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Optimal Reinsurance with Heterogeneous Reference Probabilities

Tim J. Boonen ()
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Tim J. Boonen: Amsterdam School of Economics, University of Amsterdam, Roetersstraat 11, Amsterdam 1018 WB, The Netherlands

Risks, 2016, vol. 4, issue 3, 1-11

Abstract: This paper studies the problem of optimal reinsurance contract design. We let the insurer use dual utility, and the premium is an extended Wang’s premium principle. The novel contribution is that we allow for heterogeneity in the beliefs regarding the underlying probability distribution. We characterize layer-reinsurance as an optimal reinsurance contract. Moreover, we characterize layer-reinsurance as optimal contracts when the insurer faces costs of holding regulatory capital. We illustrate this in cases where both firms use the Value-at-Risk or the conditional Value-at-Risk.

Keywords: optimal reinsurance; layer-reinsurance; subjective probability; heterogeneous beliefs; cost-of-capital (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2016
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