Pareto-optimal reinsurance revisited: a two-stage optimisation procedure approach (Q2004220)

Summary: In this paper, based on the Tail-Value-at-Risk (TVaR) measure, we revisit the Pareto-optimal reinsurance policies for the insurer and the reinsurer via a two-stage optimisation procedure. To reduce ex-post moral hazard, we assume that reinsurance contracts satisfy the principle of indemnity and the incentive compatible constraint which have been advocated by \textit{G. Huberman}, \textit{D. Mayers} and \textit{C. W. Smith jun.} [``Optimal insurance policy indemnity schedules'', Bell J. Econ. 14, No. 2, 415--426 (1983; \url{doi:10.2307/3003643})]. We show that the Pareto-optimal reinsurance policy exists if the reinsurance premiums can be expressed as an integral form. The proposed class of premium principles encompasses the net premium principle, expected value premium principle, TVaR premium principle, generalized percentile premium principle, and so on. We further use the TVaR premium principle and the expected value premium principle as examples to illustrate the two-stage optimisation procedure by deriving explicitly the Pareto-optimal reinsurance policies. We extend the results by \textit{J. Cai} et al. [Insur. Math. Econ. 77, 24--37 (2017; Zbl 1422.91329)] when the expected value premium principle is replaced by the TVaR premium principle.