Journal article
Pareto-optimal peer-to-peer risk sharing with robust distortion risk measures
ASTIN Bulletin : The Journal of the IAA, Vol.55(3), pp.537-563
09/01/2025
DOI: 10.1017/asb.2025.6
Abstract
We study Pareto optimality in a decentralized peer-to-peer risk-sharing market where agents’ preferences are represented by robust distortion risk measures that are not necessarily convex. We obtain a characterization of Pareto-optimal allocations of the aggregate risk in the market, and we show that the shape of the allocations depends primarily on each agent’s assessment of the tail of the aggregate risk. We quantify the latter via an index of probabilistic risk aversion, and we illustrate our results using concrete examples of popular families of distortion functions. As an application of our results, we revisit the market for flood risk insurance in the United States. We present the decentralized risk sharing arrangement as an alternative to the current centralized market structure, and we characterize the optimal allocations in a numerical study with historical flood data. We conclude with an in-depth discussion of the advantages and disadvantages of a decentralized insurance scheme in this setting.
Details
- Title: Subtitle
- Pareto-optimal peer-to-peer risk sharing with robust distortion risk measures
- Creators
- Mario Ghossoub - University of WaterlooMichael B. Zhu - University of WaterlooWing Fung Chong - Heriot-Watt University
- Resource Type
- Journal article
- Publication Details
- ASTIN Bulletin : The Journal of the IAA, Vol.55(3), pp.537-563
- DOI
- 10.1017/asb.2025.6
- ISSN
- 0515-0361
- eISSN
- 1783-1350
- Publisher
- Cambridge University Press
- Number of pages
- 27
- Language
- English
- Date published
- 09/01/2025
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9985179680602771
Metrics
1 Record Views