Risk sharing in equity-linked insurance products: Stackelberg equilibrium between an insurer and a reinsurer
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Risk sharing in equity-linked insurance products : Stackelberg equilibrium between an insurer and a reinsurer. / Havrylenko, Yevhen; Hinken, Maria; Zagst, Rudi.
I: ASTIN Bulletin, Bind 54, Nr. 1, 2024, s. 129-158.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Risk sharing in equity-linked insurance products
T2 - Stackelberg equilibrium between an insurer and a reinsurer
AU - Havrylenko, Yevhen
AU - Hinken, Maria
AU - Zagst, Rudi
N1 - Publisher Copyright: © 2024 Cambridge University Press. All rights reserved.
PY - 2024
Y1 - 2024
N2 - We study the optimal investment-reinsurance problem in the context of equity-linked insurance products. Such products often have a capital guarantee, which can motivate insurers to purchase reinsurance. Since a reinsurance contract implies an interaction between the insurer and the reinsurer, we model the optimization problem as a Stackelberg game. The reinsurer is the leader in the game and maximizes its expected utility by selecting its optimal investment strategy and a safety loading in the reinsurance contract it offers to the insurer. The reinsurer can assess how the insurer will rationally react on each action of the reinsurer. The insurance company is the follower and maximizes its expected utility by choosing its investment strategy and the amount of reinsurance the company purchases at the price offered by the reinsurer. In this game, we derive the Stackelberg equilibrium for general utility functions. For power utility functions, we calculate the equilibrium explicitly and find that the reinsurer selects the largest reinsurance premium such that the insurer may still buy the maximal amount of reinsurance. Since in the equilibrium the insurer is indifferent in the amount of reinsurance, in practice, the reinsurer should consider charging a smaller reinsurance premium than the equilibrium one. Therefore, we propose several criteria for choosing such a discount rate and investigate its wealth-equivalent impact on the expected utility of each party.
AB - We study the optimal investment-reinsurance problem in the context of equity-linked insurance products. Such products often have a capital guarantee, which can motivate insurers to purchase reinsurance. Since a reinsurance contract implies an interaction between the insurer and the reinsurer, we model the optimization problem as a Stackelberg game. The reinsurer is the leader in the game and maximizes its expected utility by selecting its optimal investment strategy and a safety loading in the reinsurance contract it offers to the insurer. The reinsurer can assess how the insurer will rationally react on each action of the reinsurer. The insurance company is the follower and maximizes its expected utility by choosing its investment strategy and the amount of reinsurance the company purchases at the price offered by the reinsurer. In this game, we derive the Stackelberg equilibrium for general utility functions. For power utility functions, we calculate the equilibrium explicitly and find that the reinsurer selects the largest reinsurance premium such that the insurer may still buy the maximal amount of reinsurance. Since in the equilibrium the insurer is indifferent in the amount of reinsurance, in practice, the reinsurer should consider charging a smaller reinsurance premium than the equilibrium one. Therefore, we propose several criteria for choosing such a discount rate and investigate its wealth-equivalent impact on the expected utility of each party.
KW - insurance
KW - portfolio optimization
KW - reinsurance
KW - Risk sharing
KW - Stackelberg equilibrium
U2 - 10.1017/asb.2023.32
DO - 10.1017/asb.2023.32
M3 - Journal article
AN - SCOPUS:85175072995
VL - 54
SP - 129
EP - 158
JO - ASTIN Bulletin: The Journal of the IAA
JF - ASTIN Bulletin: The Journal of the IAA
SN - 0515-0361
IS - 1
ER -
ID: 382853247