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Concave distortion risk minimizing reinsurance design under adverse selection

Author

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

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.

Suggested Citation

  • Cheung, Ka Chun & Phillip Yam, Sheung Chi & Yuen, Fei Lung & Zhang, Yiying, 2020. "Concave distortion risk minimizing reinsurance design under adverse selection," Insurance: Mathematics and Economics, Elsevier, vol. 91(C), pages 155-165.
    • Handle: RePEc:eee:insuma:v:91:y:2020:i:c:p:155-165
    DOI: 10.1016/j.insmatheco.2020.02.001
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    1. Wakker, Peter P. & Yang, Jingni, 2021. "Concave/convex weighting and utility functions for risk: A new light on classical theorems," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 429-435.

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    More about this item

    Keywords

    Risk management; Principal–agent problem; Distortion risk measure; Incentive compatibility; Individual rationality;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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