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An Analysis of Reinsurance Optimisation in Life

Elena Veprauskaite () and Michael Sherris ()
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Elena Veprauskaite: School of Management, University of Bath
Michael Sherris: School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales

No 201204, Working Papers from ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales

Abstract: This paper considers optimal reinsurance based on an assessment of the reinsurance arrangements for a large life insurer. The objective is to determine the reinsurance structure, based on actual insurer data, using a modified mean-variance criteria that maximises the retained premiums and minimizes the variance of retained claims while keeping the retained risk exposure constant, assuming a given level of risk appetite. The portfolio of life and disability policies use quota-share, surplus and a combination of both quota-share and surplus reinsurance. Alternative reinsurance arrangements are compared using the modified mean-variance criteria to assess the optimal reinsurance strategy. The analysis takes into account recent claims experience as well as actual premiums paid by insured lives and to the reinsurers. Optimal reinsurance cover depends on many factors including retention levels, premiums and the variance of sum insured values (and therefore claims), as a result an insurer should assess the tradeoff between retained premiums and the variance of retained claims based on its own experience and risk appetite.

Keywords: Life insurance; optimal reinsurance; proportional reinsurance; mean-variance criteria (search for similar items in EconPapers)
JEL-codes: G22 G32 L21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-rmg
Date: 2012-03
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http://cepar.edu.au/media/76253/an_analysis_of_rei ... n_life_insurance.pdf First version, 2012 (application/pdf)
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