CDF Formulation for Solving an Optimal Reinsurance Problem
Weng, C., Zhuang, S.C., 2016. CDF Formulation for solving an optimal reinsurance problem. Scandinavian Actuarial Journal
30 Pages Posted: 6 Feb 2017
Date Written: April 24, 2014
An innovative cumulative distribution function (CDF) based method is proposed for deriving optimal reinsurance contracts to maximize an insurer’s survival probability. The optimal reinsurance model is a non-concave constrained stochastic maximization problem, and the CDF based method transforms it into a functional concave programming problem of determining an optimal CDF over a corresponding feasible set. Compared to the existing literature, our proposed CDF formulation provides a more transparent derivation of the optimal solutions, and more interestingly, it enables us to study a further complex model with an extra background risk and more sophisticated premium principle.
Keywords: CDF formulation, Lagrangian dual method, optimal reinsurance, survival probability maximization, background risk, generalized Wang’s premium principle
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