Risk Sharing with Multiple Indemnity Environments

European Journal of Operational Research, forthcoming

41 Pages Posted: 25 Jun 2020 Last revised: 8 Mar 2021

See all articles by Alexandru Vali Asimit

Alexandru Vali Asimit

Cass Business School, City, University of London

Tim J. Boonen

University of Amsterdam

Yichun Chi

Central University of Finance and Economics (CUFE)

Wing Fung Chong

Heriot-Watt University - Department of Actuarial Mathematics and Statistics

Date Written: February 21, 2021

Abstract

Optimal risk sharing arrangements have been substantially studied in the literature, from the aspects of generalizing objective functions, incorporating more business constraints, and investigating different optimality criteria. This paper proposes an insurance model with multiple risk environments. We study the case where the two agents are endowed with the Value-at-Risk or the Tail Value-at-Risk, or when both agents are risk-neutral but have heterogeneous beliefs regarding the underlying probability distribution. We show that layer-type indemnities, within each risk environment, are Pareto optimal, which may be environment-specific. From Pareto optimality, we get that the premium can be chosen in a given interval, and we propose to allocate the gains from risk sharing equally between the buyer and seller.

Keywords: Risk management, Optimal insurance, Multiple risk environments, Value-at-Risk, Tail Value-at-Risk, Heterogeneous beliefs, Environment-specific layer indemnities

Suggested Citation

Asimit, Alexandru Vali and Boonen, Tim J. and Chi, Yichun and Chong, Wing Fung, Risk Sharing with Multiple Indemnity Environments (February 21, 2021). European Journal of Operational Research, forthcoming, Available at SSRN: https://ssrn.com/abstract=3616746 or http://dx.doi.org/10.2139/ssrn.3616746

Alexandru Vali Asimit

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tim J. Boonen

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/b/o/t.j.boonen/t.j.boonen.html

Yichun Chi

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Wing Fung Chong (Contact Author)

Heriot-Watt University - Department of Actuarial Mathematics and Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

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