Optimal Reinsurance Revisited – Point of View of Cedent and Reinsurer

Werner Hürlimann

ASTIN Bulletin, 2011, vol. 41, issue 2, 547-574

Abstract: It is known that the partial stop-loss contract is an optimal reinsurance form under the VaR risk measure. Assuming that market premiums are set according to the expected value principle with varying loading factors, the optimal reinsurance parameters of this contract are obtained under three alternative single and joint party reinsurance criteria: (i) strong minimum of the total retained loss VaR measure; (ii) weak minimum of the total retained loss VaR measure and maximum of the reinsurer's expected profit; (iii) weak minimum of the total retained loss VaR measure and minimum of the total variance risk measure. New conditions for financing in the mean simultaneously the cedent's and the reinsurer's required VaR economic capital are revealed for situations of pure risk transfer (classical reinsurance) or risk and profit transfer (design of internal reinsurance or reinsurance captive owned by the captive of a corporate firm).

Date: 2011
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