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Optimal reinsurance under VaR and CTE risk measures

Listed author(s):
  • Cai, Jun
  • Tan, Ken Seng
  • Weng, Chengguo
  • Zhang, Yi
Registered author(s):

    Let X denote the loss initially assumed by an insurer. In a reinsurance design, the insurer cedes part of its loss, say f(X), to a reinsurer, and thus the insurer retains a loss If(X)=X-f(X). In return, the insurer is obligated to compensate the reinsurer for undertaking the risk by paying the reinsurance premium. Hence, the sum of the retained loss and the reinsurance premium can be interpreted as the total cost of managing the risk in the presence of reinsurance. Based on a technique used in [Müller, A., Stoyan, D., 2002. Comparison Methods for Stochastic Models and Risks. In: Willey Series in Probability and Statistics] and motivated by [Cai J., Tan K.S., 2007. Optimal retention for a stop-loss reinsurance under the VaR and CTE risk measure. Astin Bull. 37 (1), 93-112] on using the value-at-risk (VaR) and the conditional tail expectation (CTE) of an insurer's total cost as the criteria for determining the optimal reinsurance, this paper derives the optimal ceded loss functions in a class of increasing convex ceded loss functions. The results indicate that depending on the risk measure's level of confidence and the safety loading for the reinsurance premium, the optimal reinsurance can be in the forms of stop-loss, quota-share, or change-loss.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167-6687(08)00075-9
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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 43 (2008)
    Issue (Month): 1 (August)
    Pages: 185-196

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    Handle: RePEc:eee:insuma:v:43:y:2008:i:1:p:185-196
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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    1. Gajek, Leslaw & Zagrodny, Dariusz, 2004. "Optimal reinsurance under general risk measures," Insurance: Mathematics and Economics, Elsevier, vol. 34(2), pages 227-240, April.
    2. Basak, Suleyman & Shapiro, Alexander, 2001. "Value-at-Risk-Based Risk Management: Optimal Policies and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 371-405.
    3. Yamai, Yasuhiro & Yoshiba, Toshinao, 2005. "Value-at-risk versus expected shortfall: A practical perspective," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 997-1015, April.
    4. Kaluszka, Marek, 2001. "Optimal reinsurance under mean-variance premium principles," Insurance: Mathematics and Economics, Elsevier, vol. 28(1), pages 61-67, February.
    5. Cai, Jun & Tan, Ken Seng, 2007. "Optimal Retention for a Stop-loss Reinsurance Under the VaR and CTE Risk Measures," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 37(01), pages 93-112, May.
    6. Kaluszka, Marek, 2005. "Optimal reinsurance under convex principles of premium calculation," Insurance: Mathematics and Economics, Elsevier, vol. 36(3), pages 375-398, June.
    7. Inui, Koji & Kijima, Masaaki, 2005. "On the significance of expected shortfall as a coherent risk measure," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 853-864, April.
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