OPTIMAL REINSURANCE DESIGN WITH DISTORTION RISK MEASURES AND ASYMMETRIC INFORMATION

Abstract

ABSTRACT This paper studies a problem of optimal reinsurance design under asymmetric information. The insurer adopts distortion risk measures to quantify his/her risk position, and the reinsurer does not know the functional form of this distortion risk measure. The risk-neutral reinsurer maximizes his/her net profit subject to individual rationality and incentive compatibility constraints. The optimal reinsurance menu is succinctly derived under the assumption that one type of insurer has a larger willingness to pay than the other type of insurer for every risk. Some comparative analyses are given as illustrations when the insurer adopts the value at risk or the tail value at risk as preferences.