Determination of the Optimal Retention Level Based on Different Measures

Başak Bulut Karageyik and Şule Şahin
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Başak Bulut Karageyik: Department of Actuarial Sciences, Hacettepe University, 06800 Ankara, Turkey
Şule Şahin: Department of Actuarial Sciences, Hacettepe University, 06800 Ankara, Turkey

JRFM, 2017, vol. 10, issue 1, 1-21

Abstract: This paper deals with the optimal retention level under four competitive criteria: survival probability, expected profit, variance and expected shortfall of the insurer’s risk. The aggregate claim amounts are assumed to be distributed as compound Poisson, and the individual claim amounts are distributed exponentially. We present an approach to determine the optimal retention level that maximizes the expected profit and the survival probability, whereas minimizing the variance and the expected shortfall of the insurer’s risk. In the decision making process, we concentrate on multi-attribute decision making methods: the Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) and the VlseKriterijumska Optimizacija I Kompromisno Resenje (VIKOR) methods with their extended versions. We also provide comprehensive analysis for the determination of the optimal retention level under both the expected value and standard deviation premium principles.

Keywords: optimal reinsurance; survival probability; expected profit; expected shortfall; variance of the insurer’s risk; TOPSIS; VIKOR (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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