Data from University of Waterloo Provide New Insights into Operations Science (Optimal Dynamic Reinsurance Policies Under a Generalized Denneberg’s Absolute Deviation Principle)

2020 APR 03 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- Research findings on Science - Operations Science are discussed in a new report. According to news originating from Waterloo, Canada, by NewsRx correspondents, research stated, “This paper studies the optimal dynamic reinsurance policy for an insurance company whose surplus is modeled by the diffusion approximation of the classical Cramer-Lundberg model. We assume the reinsurance premium is calculated according to a proposed Mean-CVaR premium principle which generalizes Denneberg’s absolute deviation principle and expected value principle.”

Funders for this research include Natural Sciences and Engineering Research Council of Canada, Oxford - Man Institute of Quantitative Finance, Oxford-Nie Financial Big Data Lab, University of Waterloo.

Our news journalists obtained a quote from the research from the University of Waterloo, “Moreover, we require that both ceded loss and retention functions are non-decreasing to rule out moral hazard. Under the objective of minimizing the ruin probability, we obtain the optimal reinsurance policy explicitly and we denote the resulting treaty as the dual excess-of-loss reinsurance. This form of the optimal treaty is new to the literature and lends support to the fact that reinsurance contracts in practice often involve layers. It also demonstrates that reinsurance treaties such as the proportional and the standard excess-of-loss, which are typically found to be optimal in the dynamic reinsurance model, need not be optimal when we consider a more general optimization model. We also consider other generalizations including (i) allowing the insurer to manage its business through both reinsurance and investment; and (ii) N-piecewise Mean-CVaR premium principle. In the former case, we not only show that the dual excess-of-loss reinsurance policy remains optimal, but also demonstrate that investing in stock can further enhance insurer’s financial stability with lower ruin probability.”

According to the news editors, the research concluded: “For the latter case, we establish that the optimal reinsurance treaty can have at most N layers, which is also more consistent with practice.”

For more information on this research see: Optimal Dynamic Reinsurance Policies Under a Generalized Denneberg’s Absolute Deviation Principle. European Journal of Operational Research, 2020;282(1):345-362. European Journal of Operational Research can be contacted at: Elsevier, Radarweg 29, 1043 Nx Amsterdam, Netherlands. (Elsevier - www.elsevier.com; European Journal of Operational Research - http://www.journals.elsevier.com/european-journal-of-operational-research/)

The news correspondents report that additional information may be obtained from P.Y. Wei, University of Waterloo, Dept. of Statistical and Actuarial Sciences, 200 Univ Ave West, Waterloo, On N2L 3G1, Canada. Additional authors for this research include K.S. Tan, W. Wei and S.C. Zhuang.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.ejor.2019.08.053. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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