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An Analysis of Reinsurance Optimisation in Life

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Author Info

  • 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)

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    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.

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    File URL: http://cepar.edu.au/media/76253/an_analysis_of_reinsurance_optimisation_in_life_insurance.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201204.

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    Length: 21 pages
    Date of creation: Mar 2012
    Date of revision:
    Handle: RePEc:asb:wpaper:201204

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    Related research

    Keywords: Life insurance; optimal reinsurance; proportional reinsurance; mean-variance criteria;

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    References

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    1. Krvavych, Yuriy & Sherris, Michael, 2006. "Enhancing insurer value through reinsurance optimization," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 495-517, June.
    2. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2008. "The Costs and Benefits of Reinsurance," Cahiers de recherche 08-04, HEC Montréal, Institut d'économie appliquée.
    3. Verlaak, Robert & Beirlant, Jan, 2003. "Optimal reinsurance programs: An optimal combination of several reinsurance protections on a heterogeneous insurance portfolio," Insurance: Mathematics and Economics, Elsevier, vol. 33(2), pages 381-403, October.
    4. Prakash Shimpi, 2002. "Integrating Risk Management And Capital Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(4), pages 27-40.
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