Robust reinsurance contract with learning and ambiguity aversion

Duni Hu and Hailong Wang

Scandinavian Actuarial Journal, 2022, vol. 2022, issue 9, 794-815

Abstract: We investigate the robust reinsurance demand and price under learning and ambiguity aversion. In the reinsurance contract, the insurer is ambiguity neutral and believes that he is perfectly informed, and the reinsurer is a Bayesian learner and is aware that even the filtered model is the best description of the data-generating process, might not forecast the future claims correctly. The ambiguity-averse reinsurer has a preference for reinsurance contract which is robust to model misspecification. Closed-form expressions for the robust reinsurance demand and price are derived. We find that both the reinsurer's one-sided learning and ambiguity aversion influence the structures and levels of the optimal reinsurance demand and price. Moreover, if the ambiguity-averse reinsurer specifies the suboptimal reinsurance contract as an ambiguity-neutral decision-maker, it will result in significant utility loss and the utility loss increases with ambiguity aversion level and Bayesian volatility.

Date: 2022
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DOI: 10.1080/03461238.2022.2030398

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