Optimal Reinsurance with Heterogeneous Reference Probabilities

Optimal Reinsurance with Heterogeneous Reference Probabilities

This paper studies the problem of optimal reinsurance contract design. We let the insurer use dual utility, and the premium is an extended Wang’s premium principle. The novel contribution is that we allow for heterogeneity in the beliefs regarding the underlying probability distribution. We characte...

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Bibliographic Details
Main Author: Tim J. Boonen
Format: Article
Language:English
Published: MDPI AG 2016-07-01
Series:Risks
Subjects:
optimal reinsurance
layer-reinsurance
subjective probability
heterogeneous beliefs
cost-of-capital
Online Access:http://www.mdpi.com/2227-9091/4/3/26
Description
Summary:This paper studies the problem of optimal reinsurance contract design. We let the insurer use dual utility, and the premium is an extended Wang’s premium principle. The novel contribution is that we allow for heterogeneity in the beliefs regarding the underlying probability distribution. We characterize layer-reinsurance as an optimal reinsurance contract. Moreover, we characterize layer-reinsurance as optimal contracts when the insurer faces costs of holding regulatory capital. We illustrate this in cases where both firms use the Value-at-Risk or the conditional Value-at-Risk.
ISSN:2227-9091

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