Bowley reinsurance with asymmetric information: a first-best solution

Abstract

Bowley reinsurance solutions are reinsurance contracts for which the reinsurer optimally sets the pricing density while anticipating that the insurer will choose the optimal reinsurance indemnity given this pricing density. This Bowley solution concept of equilibrium reinsurance strategy has been revisited in the modern risk management framework by Boonen et al. [(2021). Bowley reinsurance with asymmetric information on the insurer's risk preferences. Scandinavian Actuarial Journal 2021, 623–644], where the insurer and reinsurer are both endowed with distortion risk measures but there is asymmetric information on the distortion risk measure of the insurer. In this article, we continue to study this framework, but we allow the premium principle to be more flexible. We call this solution the first-best Bowley solution. We provide first-best Bowley solutions in closed form under very general assumptions. We implement some numerical examples to illustrate the findings and the comparisons with the second-best solution. The main result is further extended to the case when both the reinsurer and the insurers have heterogeneous beliefs on the distribution functions of the underlying risk.