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Dynamic Reinsurance Strategy
Department of Accounting and Finance, Faculty of Business Administration, Toyo University, Tokyo, Japan
- 1 Department of Accounting and Finance, Faculty of Business Administration, Toyo University, Tokyo, Japan
Journal of Mathematical Finance·Volume 13 (2023)·Pages 284–303·Published 4 July 2023·DOI10.4236/jmf.2023.133018
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Abstract
In this paper, I consider insurers’ reinsurance strategies to find an optimal reinsurance cover ratio for underwritten insurance exposure. First, I describe the one-period model and the continuous time dynamic model by stochastic differential equation in the same structure. Second, I translate the one-period model solution, where VaR is used as a risk measure (a target function to minimize), into the kinked CRRA utility dynamic model for a reinsurance strategy. Numerical simulations are also performed. I show that the reinsurance premium buffer divided by the variance of underwritten risk and divided by the insurer’s risk averseness indicates the optimal ratio of how much risk should be mitigated by reinsurance.
KeywordsReinsuranceStochastic ProcessOptimal Dynamic Strategy
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