Concave distortion risk minimizing reinsurance design under adverse selection

Ka Chun Cheung, Sheung Chi Phillip Yam, Fei Lung Yuen and Yiying Zhang

Insurance: Mathematics and Economics, 2020, vol. 91, issue C, 155-165

Abstract: This article makes use of the well-known Principal–Agent (multidimensional screening) model commonly used in economics to analyze a monopolistic reinsurance market in the presence of adverse selection, where the risk preference of each insurer is guided by its concave distortion risk measure of the terminal wealth position; while the reinsurer, under information asymmetry, aims to maximize its expected profit by designing an optimal policy provision (menu) of “shirt-fit” stop-loss reinsurance contracts for every insurer of either type of low or high risk. In particular, the most representative case of Tail Value-at-Risk (TVaR) is further explored in detail so as to unveil the underlying insight from economics perspective.

Keywords: Risk management; Principal–agent problem; Distortion risk measure; Incentive compatibility; Individual rationality (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:91:y:2020:i:c:p:155-165

DOI: 10.1016/j.insmatheco.2020.02.001

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