IDEAS home Printed from https://ideas.repec.org/a/eee/insuma/v113y2023icp274-292.html
   My bibliography  Save this article

Optimal risk management with reinsurance and its counterparty risk hedging

Author

Listed:
  • Chi, Yichun
  • Hu, Tao
  • Huang, Yuxia

Abstract

In this paper, we revisit the study of an optimal risk management strategy for an insurer who wants to maximize the expected utility by purchasing reinsurance and managing reinsurance counterparty risk with a default-free hedging instrument, where the reinsurance premium is calculated by the expected value principle and the price of the hedging instrument equals the expected payoff plus a proportional loading. Different to previous studies, we exclude ex post moral hazard by imposing the no-sabotage condition on reinsurance contracts and derive the optimal strategy analytically. We find that the stop-loss reinsurance is always optimal, but the form of the optimal hedging payoff depends on the cost difference between reinsurance and hedging instrument. We further show that full risk transfer is optimal if and only if both reinsurance pricing and the hedging price are fair. Finally, numerical analyses are conducted to illustrate the effects of some interesting factors on the optimal risk management strategy.

Suggested Citation

  • Chi, Yichun & Hu, Tao & Huang, Yuxia, 2023. "Optimal risk management with reinsurance and its counterparty risk hedging," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 274-292.
    • Handle: RePEc:eee:insuma:v:113:y:2023:i:c:p:274-292
    DOI: 10.1016/j.insmatheco.2023.09.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167668723000859
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.insmatheco.2023.09.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Risk management; Counterparty risk; Hedging; Mossin's theorem; No-sabotage condition;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:113:y:2023:i:c:p:274-292. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505554 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.