Reciprocal Reinsurance Treaties Under an Optimal and Fair Joint Survival Probability

By Lawrence Leonard Bilello, Melina Mailhot

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Abstract

In this paper, we study reinsurance treaties between an insurer and a reinsurer, considering both parties’ interests. Most papers only focus on the insurer’s point of view. The latest research considering both sides has considerably oversimplified the joint survival function. This situation leads to an unrealistic optimal solution; one of the parties can make risk-free profits while the other bears all the risk. Here, we define and optimize a fair joint survival probability for a reciprocal reinsurance treaty, under the expected value principle, for both quota-share and stop-loss reinsurance contracts.

Keywords: Reinsurance treaties, optimization, joint survival, expected value principle

Citation

Bilello, Lawrence Leonard, and Melina Mailhot, "Reciprocal Reinsurance Treaties Under an Optimal and Fair Joint Survival Probability," Variance 11:1, 2018, pp. 11-22.

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Mission Statement

Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.