Are quantile risk measures suitable for risk-transfer decisions? (Q414617)

This paper deals with the following quantile risk measures: Value at Risk (VaR), the Conditional Tail Expectation (CTE), and the Lower Conditional Tail Expectation (\(\text{CTE}^{-}\)). The authors introduce the notion of a random treaty, which allows a unified analysis of the optimal reinsurance problem under the different criteria involving VaR, CTE, and \(\text{CTE}^{-}\). The approach consists in finding necessary optimality conditions for a relaxed problem and proving that for each candidate optimal solution there is a nonrandom treaty that has the same rating. The obtained results show that the use of measures like VaR, CTE or \(\text{CTE}^{-}\) in optimization criteria for insurance or reinsurance can lead to treaties that are clearly bad for the cedent.