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Optimal reinsurance subject to Vajda condition. (English) Zbl 1284.91217
Summary: In this paper, we study optimal reinsurance design by minimizing the risk-adjusted value of an insurer’s liability, where the valuation is carried out by a cost-of-capital approach based either on the value at risk or the conditional value at risk. To prevent moral hazard and to be consistent with the spirit of reinsurance, we follow [S. Vajda, “Minimum variance reinsurance”, Astin Bull. 2, No. 2, 257–260 (1962)] and assume that both the insurer’s retained loss and the proportion paid by a reinsurer are increasing in indemnity. We analyze the optimal solutions for a wide class of reinsurance premium principles which satisfy three axioms (law invariance, risk loading and preserving convex order) and encompass ten of the eleven widely used premium principles listed in [V. R. Young, “Premium principles”, in: J. L. Teugels (ed.) and B. Sundt (ed.), Encyclopedia of actuarial science, Vol. 3. Hoboken, NJ: John Wiley & Sons (2004), see Zbl 1114.62112 for the whole collection]. Our results show that the optimal ceded loss functions are in the form of three interconnected line segments. Further simplified forms of the optimal reinsurance are obtained for the premium principles under an additional mild constraint. Finally, to illustrate the applicability of our results, we derive the optimal reinsurance explicitly for both the expected value principle and Wang’s principle.

MSC:
91B30 Risk theory, insurance (MSC2010)
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