Journal article
Pareto-optimal reinsurance policies in the presence of individual risk constraints
Annals of operations research, Vol.274(1-2), pp.395-423
03/01/2019
DOI: 10.1007/s10479-018-2820-4
Abstract
The notion of Pareto optimality is commonly employed to formulate decisions that reconcile the conflicting interests of multiple agents with possibly different risk preferences. In the context of a one-period reinsurance market comprising an insurer and a reinsurer, both of which perceive risk via distortion risk measures, also known as dual utilities, this article characterizes the set of Pareto-optimal reinsurance policies analytically and visualizes the insurer-reinsurer trade-off structure geometrically. The search of these policies is tackled by translating it mathematically into a functional minimization problem involving a weighted average of the insurer's risk and the reinsurer's risk. The resulting solutions not only cast light on the structure of the Pareto-optimal contracts, but also allow us to portray the resulting insurer-reinsurer Pareto frontier graphically. In addition to providing a pictorial manifestation of the compromise reached between the insurer and reinsurer, an enormous merit of developing the Pareto frontier is the considerable ease with which Pareto-optimal reinsurance policies can be constructed even in the presence of the insurer's and reinsurer's individual risk constraints. A strikingly simple graphical search of these constrained policies is performed in the special cases of Value-at-Risk and Tail Value-at-Risk.
Details
- Title: Subtitle
- Pareto-optimal reinsurance policies in the presence of individual risk constraints
- Creators
- Ambrose Lo - University of IowaZhaofeng Tang - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Annals of operations research, Vol.274(1-2), pp.395-423
- Publisher
- SPRINGER
- DOI
- 10.1007/s10479-018-2820-4
- ISSN
- 0254-5330
- eISSN
- 1572-9338
- Number of pages
- 29
- Grant note
- College of Liberal Arts and Sciences, The University of Iowa Stanley International Travel Award from International Programs, The University of Iowa Centers of Actuarial Excellence (CAE) Research Grant (2018-2021) from the Society of Actuaries (SOA)
- Language
- English
- Date published
- 03/01/2019
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9984257743302771
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