Robin Lundberg: Optimizing aggregate excess of loss reinsurance - An application of modern portfolio optimization theory within the reinsurance space
Master thesis final presentation
Time: Wed 2023-06-07 09.45
Location: Meeting room 9, floor 2, house 1, Albano
Respondent: Robin Lundberg
Supervisor: Kristoffer Lindensjö
Reinsurance plays a vital role in the insurance industry, providing stability, increased capacity, and financing tools for insurers. The reinsurance market offers a plethora of solutions and finding an optimal reinsurance structure can sometimes be a challenging task for insurers. While most studies in the area of optimal reinsurance focus on what type of reinsurance to buy under different assumptions, this thesis takes a different approach. We aim to find an optimal structure for a company-specific case of an aggregate excess of loss reinsurance contract by stochastically model the risks exposing such a contract. We optimize the contract parameters (deductible and limit) using a modification of modern portfolio theory.
Our results show that it is indeed possible to implement such portfolio theory in the reinsurance space and optimize the structure around a performance metric versus a risk metric. We use the expected technical result as the performance metric and Value at Risk for the 90th and 96th percentiles as the risk metrics.
We manage to find an optimal set of reinsurance structures but also note that the set of optimal solutions heavily depends on the applied risk metric.