The role of a representative reinsurer in optimal reinsurance

Abstract

In this paper, we consider a one-period optimal reinsurance design model with n reinsurers and an insurer. For very general preferences of the insurer and that all reinsurers use a distortion premium principle, we establish the existence of a representative reinsurer and this in turn facilitates solving the optimal reinsurance problem with multiple reinsurers. The insurer determines its optimal risk that it wants to reinsure via this pricing formula. The risk to be reinsured is then shared by the reinsurers via tranching. The optimal ceded loss functions among multiple reinsurers are derived explicitly under the additional assumptions that the insurer's preferences are given by an inverse-S shaped distortion risk measure and that the reinsurers’ premium principles are some functions of the Conditional Value-at-Risk. We also demonstrate that under some prescribed conditions, it is never optimal for the insurer to cede its risk to more than two reinsurers.