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Pricing Reinsurance Contracts

In: Stochastic Optimization Methods in Finance and Energy

Author

Listed:
  • A. Consiglio

    (University of Palermo)

  • Domenico De Giovanni

    (University of Calabria)

Abstract

Pricing and hedging insurance contracts is hard to perform if we subscribe to the hypotheses of the celebrated Black and Scholes model. Incomplete market models allow for the relaxation of hypotheses that are unrealistic for insurance and reinsurance contracts. One such assumption is the tradeability of the underlying asset. To overcome this drawback, we propose in this chapter a stochastic programming model leading to a superhedging portfolio whose final value is at least equal to the insurance final liability. A simple model extension, furthermore, is shown to be sufficient to determine an optimal reinsurance protection for the insurer: we propose a conditional value at risk (VaR) model particularly suitable for large-scale problem instances and rationale from a risk theoretic point of view.

Suggested Citation

  • A. Consiglio & Domenico De Giovanni, 2011. "Pricing Reinsurance Contracts," International Series in Operations Research & Management Science, in: Marida Bertocchi & Giorgio Consigli & Michael A. H. Dempster (ed.), Stochastic Optimization Methods in Finance and Energy, edition 1, chapter 0, pages 125-139, Springer.
    • Handle: RePEc:spr:isochp:978-1-4419-9586-5_6
    DOI: 10.1007/978-1-4419-9586-5_6
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