Dynamic Set-Up for Designing Optimal Reinsurance Contracts

46 Pages Posted: 16 Jul 2019

See all articles by Yunzhou Chen

Yunzhou Chen

University of Liverpool

Hirbod Assa

University of Liverpool

Date Written: July 15, 2019

Abstract

In this paper, we consider a dynamic set-up for designing optimal reinsurance contracts. The main objective is to maximise the lifetime dividends of an insurance company. We study three problems. First, we consider a general dividend maximisation problem with just budget constraints; second, we add solvency conditions to the previous problem; and finally, we consider a problem with solvency constraints and a particular type of dividend functions. We show that the optimal solutions of the first and second problems do not evolve over time and can be found by solving a static problem, whereas the third problem's optimal solution evolves over time and depends on the problem specification and the state variables. We find the dual problem of the third problem and show that the optimal reinsurance contract always has a multilayer structure. Last, we consider some examples and show that in many cases, the contract is indeed a two-layer policy.

Suggested Citation

Chen, Yunzhou and Assa, Hirbod, Dynamic Set-Up for Designing Optimal Reinsurance Contracts (July 15, 2019). Available at SSRN: https://ssrn.com/abstract=3420090 or http://dx.doi.org/10.2139/ssrn.3420090

Yunzhou Chen

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Hirbod Assa (Contact Author)

University of Liverpool ( email )

Institute for Financial and Actuarial Mathematics,
Liverpool, L18 8BF
United Kingdom
447522173132 (Phone)

HOME PAGE: http://sites.google.com/site/assahirbod/

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