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Optimal Reinsurance Arrangements Under Tail Risk Measures

by Carole Bernard of the University of Waterloo, and
Weidong Tian of the University of North Carolina at Charlotte

November 23, 2008

Abstract: Regulatory authorities demand insurance companies to control their risk exposure by imposing stringent risk management policies. This article investigates the optimal risk management strategy of an insurance company subject to regulatory constraints. We provide optimal reinsurance contracts under different tail risk measures and analyze the impact of regulators' requirements on risk-sharing in the reinsurance market. Our results underpin adverse incentives for the insurer when compulsory Value-at-Risk risk management requirements are imposed. But economic effects may vary when regulatory constraints involve other risk measures. Finally, we compare the obtained optimal designs to existing reinsurance contracts and alternative risk transfer mechanisms on the capital market.

Keywords: Optimal Reinsurance, Risk Measures, Alternative Risk Transfer.

Published in: Journal of Risk and Insurance, Vol. 76, No. 3, (September 2009), pp. 709-725.

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