An efficient algorithm for pricing reinsurance contract under the regime-switching model

Manijeh Abbaspour, Kianoush Fathi Vajargah and Parvin Azhdari

Mathematics and Computers in Simulation (MATCOM), 2023, vol. 211, issue C, 278-300

Abstract: This paper suggests a new and efficient variance reduction technique based on the Monte-Carlo simulation method for pricing the reinsurance contract in a regime-switching environment. The proposed approach extends the standard antithetic variables method to K>2 antithetic variables per replication of the Monte-Carlo simulation. Since the model under the regime-switching framework describes a market with arbitrage opportunities, a risk-neutral measure by Esscher transform is provided. Under this probability measure, the proposed estimator is unbiased for pricing the reinsurance contract and increasing K which leads to more variance reduction. Finally, the success of the introduced method is confirmed numerically, and the efficacy of contract parameters is evaluated on its price.

Keywords: Catastrophe reinsurance; Monte-Carlo simulation; Regime-switching model; Variance reduction technique (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:211:y:2023:i:c:p:278-300

DOI: 10.1016/j.matcom.2023.04.018

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