Risk sharing with multiple indemnity environments

Alexandru V. Asimit, Tim J. Boonen, Yichun Chi, Wing Fung Chong

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Optimal risk sharing arrangements have been substantially studied in the literature, from the aspects of generalizing objective functions, incorporating more business constraints, and investigating different optimality criteria. This paper proposes an insurance model with multiple risk environments. We study the case where the two agents are endowed with the Value-at-Risk or the Tail Value-at-Risk, or when both agents are risk-neutral but have heterogeneous beliefs regarding the underlying probability distribution. We show that layer-type indemnities, within each risk environment, are Pareto optimal, which may be environment-specific. From Pareto optimality, we get that the premium can be chosen in a given interval, and we propose to allocate the gains from risk sharing equally between the buyer and seller.

Original languageEnglish
Pages (from-to)587-603
JournalEuropean Journal of Operational Research
Volume295
Issue number2
Early online date21 Apr 2021
DOIs
Publication statusPublished - 1 Dec 2021

Keywords

  • Environment-specific layer indemnities
  • Heterogeneous beliefs
  • Multiple risk environments
  • Optimal insurance
  • Risk management
  • Tail Value-at-Risk
  • Value-at-Risk

ASJC Scopus subject areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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