OPTIMAL REINSURANCE FROM THE PERSPECTIVES OF BOTH AN INSURER AND A REINSURER

Jun Cai, Christiane Lemieux and Fangda Liu

ASTIN Bulletin, 2016, vol. 46, issue 3, 815-849

Abstract: Optimal reinsurance from an insurer's point of view or from a reinsurer's point of view has been studied extensively in the literature. However, as two parties of a reinsurance contract, an insurer and a reinsurer have conflicting interests. An optimal form of reinsurance from one party's point of view may be not acceptable to the other party. In this paper, we study optimal reinsurance designs from the perspectives of both an insurer and a reinsurer and take into account both an insurer's aims and a reinsurer's goals in reinsurance contract designs. We develop optimal reinsurance contracts that minimize the convex combination of the Value-at-Risk (VaR) risk measures of the insurer's loss and the reinsurer's loss under two types of constraints, respectively. The constraints describe the interests of both the insurer and the reinsurer. With the first type of constraints, the insurer and the reinsurer each have their limit on the VaR of their own loss. With the second type of constraints, the insurer has a limit on the VaR of his loss while the reinsurer has a target on his profit from selling a reinsurance contract. For both types of constraints, we derive the optimal reinsurance forms in a wide class of reinsurance policies and under the expected value reinsurance premium principle. These optimal reinsurance forms are more complicated than the optimal reinsurance contracts from the perspective of one party only. The proposed models can also be reduced to the problems of minimizing the VaR of one party's loss under the constraints on the interests of both the insurer and the reinsurer.

Date: 2016
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