Optimal risk transfer for agents with germs

Peng Li, Andrew E.B. Lim and Jevaveerasingam Shanthikumar

Insurance: Mathematics and Economics, 2010, vol. 47, issue 1, 1-12

Abstract: We introduce a new class of risk measures called generalized entropic risk measures (GERMS) that allow economic agents to have different attitudes towards different sources of risk. We formulate the problem of optimal risk transfer in terms of these risk measures and characterize the optimal transfer contract. The optimal contract involves what we call intertemporal source-dependent quotient sharing, where agents linearly share changes in the aggregate risk reserve that occur in response to shocks to the system over time, with scaling coefficients that depend on the attitudes of each agent towards the source of risk causing the shock. Generalized entropic risk measures are not dilations of a common base risk measure, so our results extend the class of risk measures for which explicit characterizations of the optimal transfer contract can be found.

Keywords: Convex; risk; measure; Optimal; risk; transfer; Risk; sharing; Generalized; entropic; risk; measure; Generalized; exponential; premium; Intertemporal; source-dependent; quotient; sharing; Risk; management (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:47:y:2010:i:1:p:1-12

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