Concave distortion risk minimizing reinsurance design under adverse selection

This article makes use of the well-known Principal–Agent (multidimensional screening) model commonly used in economics to analyze a monopolistic reinsurance market in the presence of adverse selection, where the risk preference of each insurer is guided by its concave distortion risk measure of the...

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Bibliographic Details
Published inInsurance, mathematics & economics Vol. 91; pp. 155 - 165
Main Authors Cheung, Ka Chun, Phillip Yam, Sheung Chi, Yuen, Fei Lung, Zhang, Yiying
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.03.2020
Elsevier Sequoia S.A
Subjects
Adverse selection
Asymmetric information
Distortion
Distortion risk measure
Economic analysis
Economic models
Economics
Health insurance
High risk
Incentive compatibility
Individual rationality
Position measurement
Principal–agent problem
Reinsurance
Risk assessment
Risk levels
Risk management
Wealth
Principal–agent problem
G22
G32
Incentive compatibility
Distortion risk measure
Individual rationality
Risk management
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Summary:This article makes use of the well-known Principal–Agent (multidimensional screening) model commonly used in economics to analyze a monopolistic reinsurance market in the presence of adverse selection, where the risk preference of each insurer is guided by its concave distortion risk measure of the terminal wealth position; while the reinsurer, under information asymmetry, aims to maximize its expected profit by designing an optimal policy provision (menu) of “shirt-fit” stop-loss reinsurance contracts for every insurer of either type of low or high risk. In particular, the most representative case of Tail Value-at-Risk (TVaR) is further explored in detail so as to unveil the underlying insight from economics perspective.
ISSN:0167-6687
1873-5959
DOI:10.1016/j.insmatheco.2020.02.001