Optimal Reinsurance Policies When the Interests of Both the Cedent and the Reinsurer are Taken into Account

29 Pages Posted: 21 Sep 2016

See all articles by Wenjun Jiang

Wenjun Jiang

University of Calgary

Jiandong Ren

University of Western Ontario

Ricardas Zitikis

Western University

Date Written: September 17, 2016

Abstract

Optimal forms of reinsurance policies have been studied for a long time in actuarial literature. Most existing results are from the insurer's point of view, aiming at maximizing the expected utility or minimizing the risk of the insurer. However, as pointed out by Borch (1969), it is understandable that a reinsurance arrangement which might be very attractive to one party (e.g., insurer) can be quite unacceptable to the other party (e.g., reinsurer). In this paper, we follow this point of view and study forms of Pareto-optimal reinsurance policies whereby one party's risk, measured by its value-at-risk (VaR), cannot be reduced without increasing the VaR of the counter-party in the reinsurance transaction. We show that the Pareto-optimal policies can be determined by minimizing linear combinations of the VaRs of the two parties in the reinsurance transaction. Consequently, we succeed in deriving user-friendly, closed-form, optimal reinsurance policies and their parameter values.

Keywords: optimal reinsurance

Suggested Citation

Jiang, Wenjun and Ren, Jiandong and Zitikis, Ricardas, Optimal Reinsurance Policies When the Interests of Both the Cedent and the Reinsurer are Taken into Account (September 17, 2016). Available at SSRN: https://ssrn.com/abstract=2840218 or http://dx.doi.org/10.2139/ssrn.2840218

Wenjun Jiang

University of Calgary ( email )

612 Campus Place N.W.
University of Calgary
Calgary, Alberta T2N 1N4
Canada

Jiandong Ren (Contact Author)

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

Ricardas Zitikis

Western University ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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