Stochastic orders in dynamic reinsurance markets (Q1776014)

The author studies dynamic reinsurance markets where the trade index \(X\), which is defined as claims less premiums on some insurance portfolio, is driven by a compound Poisson process. This leads to an incomplete market with two trade assets, a savings account and the price process \(X\). As a consequence of this incompleteness, contingent claims (reinsurance contracts) cannot be priced uniquely by using no-arbitrage theory alone. In this setting the authors determine two optimal martingale measures known from the literature on incomplete financial markets, the minimal martingale measure and the minimal entropy martingale measure. The main result of the present paper is a criterion for the ordering of prices under two given martingale measures, which shows that these two optimal martingale measures are ordered by the so-called convex order. It is shown that for any convex function \(\Phi\), the price of the contract with payoff \(\Phi(X_T)\) is smaller under the minimal martingale measure than under the minimal entropy martingale measure.