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ON A NEW PARADIGM OF OPTIMAL REINSURANCE: A STOCHASTIC STACKELBERG DIFFERENTIAL GAME BETWEEN AN INSURER AND A REINSURER

Published online by Cambridge University Press:  26 March 2018

Lv Chen  and
Yang Shen
Lv Chen
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, N2L 3G1, Canada School of Statistics, East China Normal University, 500 Dongchuan Road, Shanghai 200241, China
Yang Shen*
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, N2L 3G1, Canada
*
E-mail: [email protected], [email protected]
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Abstract

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This paper proposes a new continuous-time framework to analyze optimal reinsurance, in which an insurer and a reinsurer are two players of a stochastic Stackelberg differential game, i.e., a stochastic leader-follower differential game. This allows us to determine optimal reinsurance from joint interests of the insurer and the reinsurer, which is rarely considered in the continuous-time setting. In the Stackelberg game, the reinsurer moves first and the insurer does subsequently to achieve a Stackelberg equilibrium toward optimal reinsurance arrangement. Speaking more precisely, the reinsurer is the leader of the game and decides on an optimal reinsurance premium to charge, while the insurer is the follower of the game and chooses an optimal proportional reinsurance to purchase. Under utility maximization criteria, we study the game problem starting from the general setting with generic utilities and random coefficients to the special case with exponential utilities and constant coefficients. In the special case, we find that the reinsurer applies the variance premium principle to calculate the optimal reinsurance premium and the insurer's optimal ceding/retained proportion of insurance risk depends not only on the risk aversion of itself but also on that of the reinsurer.

Keywords

Stackelberg gameproportional reinsurancestochastic Hamilton-Jacobi-Bellman equationbackward stochastic differential equationvariance premium principle
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 48 , Issue 2 , May 2018 , pp. 905 - 960
Copyright
Copyright © Astin Bulletin 2018 

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