Reinsurance Decision Making and Expected Utility

• Main Authors: SAMSON, Danny, Thomas, Howard
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1983
• Subjects: Insurance; utility theory; Business; Management Sciences and Quantitative Methods
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3930; https://www.jstor.org/stable/252352
• Institution: Singapore Management University

Utility theory is developed and applied in this article as a choice criterion for decisions concerning which types and extents of reinsurances are most appropriate for an insurer. Using an undimensional utility function, reinsurance options are evaluated by calculating an upper bound premium (i.e., the maximum that the insurer should consider paying for a particular reinsurance agreement), which can be compared with market rates. Comparisons between reinsurance options can thus be accurately made as a function of the probability density function of the original loss, the modifications made by various ceding agreements, and the risk attitude of the insurer.