Risk sharing with multiple indemnity environments

Alexandru V. Asimit, Tim J. Boonen, Yichun Chi and Wing Fung Chong

European Journal of Operational Research, 2021, vol. 295, issue 2, 587-603

Abstract: Optimal risk sharing arrangements have been substantially studied in the literature, from the aspects of generalizing objective functions, incorporating more business constraints, and investigating different optimality criteria. This paper proposes an insurance model with multiple risk environments. We study the case where the two agents are endowed with the Value-at-Risk or the Tail Value-at-Risk, or when both agents are risk-neutral but have heterogeneous beliefs regarding the underlying probability distribution. We show that layer-type indemnities, within each risk environment, are Pareto optimal, which may be environment-specific. From Pareto optimality, we get that the premium can be chosen in a given interval, and we propose to allocate the gains from risk sharing equally between the buyer and seller.

Keywords: Risk management; Optimal insurance; Multiple risk environments; Value-at-Risk; Tail Value-at-Risk; Heterogeneous beliefs; Environment-specific layer indemnities (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:295:y:2021:i:2:p:587-603

DOI: 10.1016/j.ejor.2021.03.012

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