The optimal reinsurance strategy with price-competition between two reinsurers

We study optimal reinsurance for an insurer and two reinsurers in the market through stochastic game theory. The relationship between the insurer and reinsurers is described by a Stackelberg model, where reinsurers, as market leaders, set prices for reinsurance treaties, and the insurer, as a price taker, determines reinsurance demand. Furthermore, we employ a Nash game to model the price competition between the two reinsurers who adopt different premium principles: the variance premium principle and the expected value premium principle. Both the insurer and reinsurers aim to maximize their respective mean-variance cost functions, leading to a time inconsistency control problem. This issue is resolved using a corresponding extended Hamilton-Jacobi-Bellman equation in the game-theoretic framework. We find that the insurer will adopt propositional and excess-of-loss reinsurance strategies with two reinsurers, respectively. Moreover, under an exponential claim size distribution, there exists a unique equilibrium reinsurance premium strategy. Our numerical analysis illuminates the effects of claim size, risk aversion, and the interest rates of the insurer and reinsurers on the equilibrium reinsurance and premium strategies, enhancing the understanding of competition in the reinsurance market.

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Publication Details

Journal
Scandinavian Actuarial Journal
Published
2024-08-09
DOI
https://doi.org/10.1080/03461238.2024.2389181
Citations
4
Primary Topic
Insurance and Financial Risk Management
Type
article
Field-Weighted Citation Impact
4.52

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article

The optimal reinsurance strategy with price-competition between two reinsurers

Fangda Liu, Liyuan Lin, Jingzhen Liu, Luyang Yu
4 citations
Scandinavian Actuarial Journal
Insurance and Financial Risk Management
4.52
article

The optimal reinsurance strategy with price-competition between two reinsurers

Fangda Liu, Liyuan Lin, Jingzhen Liu, Luyang Yu
article en
4 citations

Abstract

We study optimal reinsurance for an insurer and two reinsurers in the market through stochastic game theory. The relationship between the insurer and reinsurers is described by a Stackelberg model, where reinsurers, as market leaders, set prices for reinsurance treaties, and the insurer, as a price taker, determines reinsurance demand. Furthermore, we employ a Nash game to model the price competition between the two reinsurers who adopt different premium principles: the variance premium principle and the expected value premium principle. Both the insurer and reinsurers aim to maximize their respective mean-variance cost functions, leading to a time inconsistency control problem. This issue is resolved using a corresponding extended Hamilton-Jacobi-Bellman equation in the game-theoretic framework. We find that the insurer will adopt propositional and excess-of-loss reinsurance strategies with two reinsurers, respectively. Moreover, under an exponential claim size distribution, there exists a unique equilibrium reinsurance premium strategy. Our numerical analysis illuminates the effects of claim size, risk aversion, and the interest rates of the insurer and reinsurers on the equilibrium reinsurance and premium strategies, enhancing the understanding of competition in the reinsurance market.

Scandinavian Actuarial JournalVol. 2025(1)
Central University of Finance and Economics (CN), University of Waterloo (CA), Australian Regenerative Medicine Institute (AU), Monash University (AU)
Natural Sciences and Engineering Research Council of Canada
Zero hunger
Openalex Percentile: Top 5%
Insurance and Financial Risk Management
4.52
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The optimal reinsurance strategy with price-competition between two reinsurers — Fangda Liu, Liyuan Lin, et al. · Scandinavian Actuarial Journal (2024) | TGRS Research Map | TGRS