THE DETERMINATION OF AN OPTIMAL RETENTION OF A STOP-LOSS REINSURANCE BASED ON AN EARTHQUAKE CATASTROPHE MODEL
Indonesia is located at the meeting point of the world’s four major plates; hence it is prone to tectonic earthquakes which may cause very large financial losses. To manage this risk, reinsurance is used as an effort for risk sharing, particularly for large losses. In a stop-loss reinsurance cont...
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| Format: | Theses |
| Language: | Indonesia |
| Online Access: | https://digilib.itb.ac.id/gdl/view/84154 |
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| Institution: | Institut Teknologi Bandung |
| Language: | Indonesia |
| Summary: | Indonesia is located at the meeting point of the world’s four major plates; hence it
is prone to tectonic earthquakes which may cause very large financial losses. To
manage this risk, reinsurance is used as an effort for risk sharing, particularly for
large losses. In a stop-loss reinsurance contract, a higher retention level increases
the risk retained by an insurance company (insurer or cedent), but reduces the
reinsurance premium due to a decrease in the loss transferred to a reinsurance
company (reinsurer); and vice versa. This thesis addresses the trade-off problem
by determining an optimal retention level that minimizes the value-at-risk (VaR)
and the tail value-at-risk (TVaR) risk measures of the cedent's total cost with a
reinsurance risk premium calculated using the expected, variance, and standard
deviation premium principles. In addition, optimal retentions in multilayer stoploss
reinsurance where the reinsurer reinsures its company to another reinsurance
company(s) are also discussed. In this thesis, the determination of an optimal
retention based on the distribution of the aggregate loss data that follows a
lognormal distribution, obtained from an event loss table (ELT) of an Earthquake
Catastrophe (CAT) Model, is discussed. The ELTs are constructed based on the
distribution of the moment magnitudes of the historical tectonic earthquake
mainshocks data. The moment magnitudes are modelled by a generalized Pareto
distribution based on a given average recurrence interval. These methodologies are
applied to financial loss data due to tectonic earthquakes on residential buildings
in the Papua Region, Indonesia. The optimal retention obtained is then applied in
an earthquake disaster risk financing strategy in accordance with the financing
scheme set by the Fiscal Policy Agency, Ministry of Finance of the Republic of
Indonesia. |
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