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Stochastic Stackelberg differential reinsurance games under time-inconsistent mean–variance framework

Lv Chen and Yang Shen

Insurance: Mathematics and Economics, 2019, vol. 88, issue C, 120-137

Abstract: We study optimal reinsurance in the framework of stochastic Stackelberg differential game, in which an insurer and a reinsurer are the two players, and more specifically are considered as the follower and the leader of the Stackelberg game, respectively. An optimal reinsurance policy is determined by the Stackelberg equilibrium of the game, consisting of an optimal reinsurance strategy chosen by the insurer and an optimal reinsurance premium strategy by the reinsurer. Both the insurer and the reinsurer aim to maximize their respective mean–variance cost functionals. To overcome the time-inconsistency issue in the game, we formulate the optimization problem of each player as an embedded game and solve it via a corresponding extended Hamilton–Jacobi–Bellman equation. It is found that the Stackelberg equilibrium can be achieved by the pair of a variance reinsurance premium principle and a proportional reinsurance treaty, or that of an expected value reinsurance premium principle and an excess-of-loss reinsurance treaty. Moreover, the former optimal reinsurance policy is determined by a unique, model-free Stackelberg equilibrium; the latter one, though exists, may be non-unique and model-dependent, and depend on the tail behavior of the claim-size distribution to be more specific. Our numerical analysis provides further support for necessity of integrating the insurer and the reinsurer into a unified framework. In this regard, the stochastic Stackelberg differential reinsurance game proposed in this paper is a good candidate to achieve this goal.

Keywords: Leader–follower; Proportional reinsurance; Excess-of-loss reinsurance; Mean–variance; Time inconsistency; Stackelberg equilibrium (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:88:y:2019:i:c:p:120-137

DOI: 10.1016/j.insmatheco.2019.06.006

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Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

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