Approaches to reinsurance protection optimization

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Approaches to reinsurance protection optimization

Journal Title: Регіональна Економіка - Year 2016, Vol 80, Issue 2

Abstract

The aim of the research is to determine the methodological principles of constructing the optimal insurance portfolio based on reinsurance mechanism. In the article the features of the use of proportional and non-proportional reinsurance covers and the division of responsibility between the cedent and reinsurer for each of them are analysed. The task of creating the optimal reinsurance program is considered; the research of optimality criteria when forming reinsurance programs is compiled: optimization of reinsurance in general is impossible without simultaneous consideration of both the expectation of random net results and the extent of their possible dispersal. It’s determined that the most effective approach to optimize reinsurance cover is as follows: not the reinsurance program that gives the best and the most likely outcome, but the one that gives the best average result for the entire set of possible outcomes with regard to their probability must be considered as optimal protection. Summary of developments of theorists, practitioners, professional actuaries allows to conclude that a universal statement of reinsurance protection problem optimization does not exist because of the complexity of mathematical description and simulation of random processes (flow, reservation and settlement of damages), and because the strategic objectives and financial position of some insurers and their priorities in the reinsurance programs formation are so different that it is almost impossible to build a comprehensive and objective function and set universal limits for reinsurance optimization problems. In general, the problem of choosing the optimal reinsurance protection for the insurer reduces to sampling optimal limits, quotas and own retention to the applicable types of reinsurance. In a quota share reinsurance treaty, to achieve that goal insurer may change quota share and reinsurer’s limit, in surplus reinsurance treaty – the amount of its own retention and the quotient of reinsurance limit and own retention. Under the application of non-proportional reinsurance, the insurers may achieve the goal by changing their deductible and specified limit. Based on the analysis of the real statistics of one of the insurance companies it was shown that for sufficiently large insurance portfolio certain loss ratio could be achieved at several values of reinsurer’s limits or insurer’s own retention – one need to choose that, which gives the highest net result from operating activities.

Authors and Affiliations

Oleksandra O. Shevchuk, Yaroslav I. Sukh

Keywords

reinsurance types of reinsurance covers sharing of responsibility quota net retention loss ratio optimization

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EP ID EP437710
DOI -
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