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An Analysis of Reinsurance Optimisation in Life

Author

Listed:
  • 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)

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.

Suggested Citation

  • Elena Veprauskaite & Michael Sherris, 2012. "An Analysis of Reinsurance Optimisation in Life," Working Papers 201204, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  • Handle: RePEc:asb:wpaper:201204
    as

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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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    References listed on IDEAS

    as
    1. 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.
    2. Krvavych, Yuriy & Sherris, Michael, 2006. "Enhancing insurer value through reinsurance optimization," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 495-517, June.
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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