Optimal Reciprocal Reinsurance under VaR or TVaR Constraint

Huang Hung-Hsi () and Wang Ching-Ping ()
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Huang Hung-Hsi: Professor, Department of Banking and Finance, National Chiayi University, No. 580, Sinmin Rd., Chiayi City 60054, Taiwan
Wang Ching-Ping: Professor, Department of Public Finance and Taxation, National Kaohsiung University of Science and Technology, No. 415, Chien-Kung Rd., Sanmin District, Kaohsiung City 80778, Taiwan

Asia-Pacific Journal of Risk and Insurance, 2022, vol. 16, issue 2, 187-218

Abstract: Most existing researches on optimal reinsurance contract are based on an insurer’s viewpoint. However, the optimal reinsurance contract for an insurer is not necessarily to be optimal for a reinsurer. Hence, this study aims to develop the optimal reciprocal reinsurance which satisfies the benefits of both the insurer and reinsurer. Additionally, due to legislative restriction or risk management requirement, the wealth of insurer and reinsurer are frequently imposed upon a VaR (Value-at-Risk) or TVaR (Tail Value-at-Risk) constraint. Therefore, this study develops an optimal reciprocal reinsurance contract which maximizes the common benefits (evaluated by weighted addition of expected utilities) of the insurer and reinsurer subject to their VaR or TVaR constraints. Furthermore, for avoiding moral hazard problem, the developed contract is additionally restricted to a regular form or incentive compatibility (both indemnity schedule and retained loss schedule are continuously nondecreasing).

Keywords: optimal reinsurance; VaR; TVaR; reciprocal reinsurance; moral hazard (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/apjri-2021-0023

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