Optimal Reinsurance Design Based on Economic Premium Principle

Abstract

In this paper, we study optimal reinsurance based on the economic premium principle and distortion risk measures. The convex combination of the distortion risk measurement is constructed from the perspectives of insure and reinsurer. By minimizing the value of objective function, the piecewise linear is optimal. Then, we select two special distortion risk measures (value-at-risk (VaR) and conditional value-at-risk (CVaR)), for further analysis. The impact of different market factors is considered on optimal reinsurance. Finally, we further assume that the joint distribution of the losses and market factors has a copula with quadratic sections. We obtain the optimal reinsurance in a relatively simple form. At last, we simulate and analyze the results.

Keywords: VaR, CVaR

JEL Classification: JE27