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Optimal Reinsurance under VaR and CVaR Risk Measures: a Simplified Approach

Published online by Cambridge University Press:  09 August 2013

Yichun Chi  and
Ken Seng Tan
Ken Seng Tan
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada, E-mail: kstan@uwaterloo.ca
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Abstract

In this paper, we study two classes of optimal reinsurance models by minimizing the total risk exposure of an insurer under the criteria of value at risk (VaR) and conditional value at risk (CVaR). We assume that the reinsurance premium is calculated according to the expected value principle. Explicit solutions for the optimal reinsurance policies are derived over ceded loss functions with increasing degrees of generality. More precisely, we establish formally that under the VaR minimization model, (i) the stop-loss reinsurance is optimal among the class of increasing convex ceded loss functions; (ii) when the constraints on both ceded and retained loss functions are relaxed to increasing functions, the stop-loss reinsurance with an upper limit is shown to be optimal; (iii) and finally under the set of general increasing and left-continuous retained loss functions, the truncated stop-loss reinsurance is shown to be optimal. In contrast, under CVaR risk measure, the stop-loss reinsurance is shown to be always optimal. These results suggest that the VaR-based reinsurance models are sensitive with respect to the constraints imposed on both ceded and retained loss functions while the corresponding CVaR-based reinsurance models are quite robust.

Keywords

Conditional value at riskValue at riskStop-loss reinsuranceLimited stop-loss designTruncated stop-loss reinsuranceOptimal reinsurance
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 41 , Issue 2 , November 2011 , pp. 487 - 509
Copyright
Copyright © International Actuarial Association 2011

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