Optimal reinsurance pricing with ambiguity aversion and relative performance concerns in the principal-agent model

• Published in: Scandinavian actuarial journal Vol. 2022; no. 9; pp. 749 - 774
• Main Authors: Gu, Ailing, Chen, Shumin, Li, Zhongfei, Viens, Frederi G.
• Format: Journal Article
• Language: English
• Published: Stockholm Taylor & Francis 21.10.2022; Taylor & Francis Ltd
• Subjects: Actuarial science; compound Poisson risk model; dynamic programming; Expected utility; model ambiguity; principal-agent model; Reinsurance
• ISSN: 0346-1238; 1651-2030
• DOI: 10.1080/03461238.2022.2026459

This paper first studies the optimal reinsurance problems for two competitive insurers and then studies the optimal reinsurance premium pricing problem for their common reinsurer by using the dynamic programming technique. The two insurers are subject to common insurance systematic risk. Each purchases proportional or excess-of-loss reinsurance for risk control. They aim to maximize the expected utilities of their relative terminal wealth. With the insurers' optimal reinsurance strategies, the reinsurer decides the reinsurance premiums for each insurer, also aiming to maximize the expected utility of her terminal wealth. Thus, the optimal reinsurance pricing problem is formulated as a Stackelberg game between two competitive insurers and a reinsurer, where the reinsurer is the leader, and the insurers are followers. Besides, all three players take model ambiguity into account. We characterize the optimal strategies for the insurers and the reinsurer and provide some numerical examples to show the impact of competition and model ambiguity on the pricing of reinsurance contracts.