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
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spelling doaj-fc43255e38f14dc5955712704c3f77782020-11-25T00:14:47ZengMDPI AGRisks2227-90912016-07-01432610.3390/risks4030026risks4030026Optimal Reinsurance with Heterogeneous Reference ProbabilitiesTim J. Boonen0Amsterdam School of Economics, University of Amsterdam, Roetersstraat 11, Amsterdam 1018 WB, The NetherlandsThis 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.http://www.mdpi.com/2227-9091/4/3/26optimal reinsurancelayer-reinsurancesubjective probabilityheterogeneous beliefscost-of-capital
collection DOAJ
language English
format Article
sources DOAJ
author Tim J. Boonen
spellingShingle Tim J. Boonen
Optimal Reinsurance with Heterogeneous Reference Probabilities
Risks
optimal reinsurance
layer-reinsurance
subjective probability
heterogeneous beliefs
cost-of-capital
author_facet Tim J. Boonen
author_sort Tim J. Boonen
title Optimal Reinsurance with Heterogeneous Reference Probabilities
title_short Optimal Reinsurance with Heterogeneous Reference Probabilities
title_full Optimal Reinsurance with Heterogeneous Reference Probabilities
title_fullStr Optimal Reinsurance with Heterogeneous Reference Probabilities
title_full_unstemmed Optimal Reinsurance with Heterogeneous Reference Probabilities
title_sort optimal reinsurance with heterogeneous reference probabilities
publisher MDPI AG
series Risks
issn 2227-9091
publishDate 2016-07-01
description 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.
topic optimal reinsurance
layer-reinsurance
subjective probability
heterogeneous beliefs
cost-of-capital
url http://www.mdpi.com/2227-9091/4/3/26
work_keys_str_mv AT timjboonen optimalreinsurancewithheterogeneousreferenceprobabilities
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