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Risk Diversifying Treaty Between Two Companies with Only One in Insurance Business

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  • I. Venkat Appal Raju

    (Indian Institute of Technology Jodhpur)

  • S. Ramasubramanian

    (Indian Statistical Institute)

Abstract

We consider an insurance company (Company 1) and another company (Company 2) operating under a risk diversification treaty; we assume that Company 2 does not have any insurance business of its own. Company 2 takes care of a pre-agreed fraction of any possible deficit that Company 1 may face; in return, Company 2 gets a retainer fee at a constant rate. (The situation can also be looked upon as Company 1 acting as a subsidiary of Company 2.) The joint dynamics is modelled in terms of appropriate Skorokhod problem in the quadrant. Corresponding ruin problem is studied, and advantages of the treaty are pointed out. It is shown that ruin probability decays at a faster rate under the treaty. Some numerical results are also presented to project advantages of our formal model.

Suggested Citation

  • I. Venkat Appal Raju & S. Ramasubramanian, 2016. "Risk Diversifying Treaty Between Two Companies with Only One in Insurance Business," Sankhya B: The Indian Journal of Statistics, Springer;Indian Statistical Institute, vol. 78(2), pages 183-214, November.
    • Handle: RePEc:spr:sankhb:v:78:y:2016:i:2:d:10.1007_s13571-015-0113-3
    DOI: 10.1007/s13571-015-0113-3
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    References listed on IDEAS

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    5. S. Ramasubramanian, 2000. "A Subsidy-Surplus Model and the Skorokhod Problem in an Orthant," Mathematics of Operations Research, INFORMS, vol. 25(3), pages 509-538, August.
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