Optimal moral-hazard-free reinsurance under extended distortion premium principles
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Publication:6433468
DOI10.1137/23M1556046arXiv2304.08819OpenAlexW4396862251MaRDI QIDQ6433468FDOQ6433468
Authors: Zhuo Jin, Zuo Quan Xu, Bin Zou 
Publication date: 18 April 2023
Abstract: We study an optimal reinsurance problem under a diffusion risk model for an insurer who aims to minimize the probability of lifetime ruin. To rule out moral hazard issues, we only consider moral-hazard-free reinsurance contracts by imposing the incentive compatibility constraint on indemnity functions. The reinsurance premium is calculated under an extended distortion premium principle, in which the distortion function is not necessarily concave. We first show that an optimal reinsurance contract always exists and then derive two sufficient and necessary conditions to characterize it. Due to the presence of the incentive compatibility constraint and the nonconcavity of the distortion, the optimal contract is obtained as a solution to a double obstacle problem. At last, we apply the general result to study three examples and obtain the optimal contract in (semi)closed form.
Full work available at URL: https://doi.org/10.1137/23m1556046
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Actuarial mathematics (91G05) Optimal stochastic control (93E20) Contract theory (moral hazard, adverse selection) (91B41)
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