The Research Of Optimal Layers For Catastrophe Reinsurance On Downside Risk Measurement

In recent years, more and more human lives and property and the naturalenvironment are under serious threat because of the frequent natura l disasters,catastrophe risk prevention and control is becoming a global serious problem. Manygovernments increasingly realize the importance of commercial insurance incatastrophe prevention, however, due to the different deve lopment of ins urancemarkets and the catastrophe manage ment s ystems, there are gaps between countries onthe use of commercia l ins urance skills and ins urance capita l. At present, China hasentered into the initia l stage of the catastrophe insurance syste m, in the gradualdevelop ment of syste m design, pilot projects and legis lation promotion, it is necessaryfor ins urance companies to reform the ir catastrophe risk mana geme nt strategiesurgently.There are few studies on optima l catastrophe reinsurance currently, and the impactof catastrophic risk on the insurer’s operating effic iency is seldom cons idered. Most ofthe existing stud ies on optimal reins urance have following features: focused on theoptima l type of reins urance, rarely give specific reins urance optio ns, and can notquantify the effectiveness of re ins urance; there is no clear definition o f catastropherisk for a certain type of disaster, the role o f reinsurance on catastrophe risk transfercan’t be quantified; what’s more, research on the relationship between underwritingrisk and profit is also sketchily. Focus on the above blind spots, this paper will measurethe downs ide risk of insurance business, assess underwriting profit under catastropherisk to explore and improve the princip le of optimal configuration on catastrophereinsura nce for insurer.This paper introduces the theory of optima l reinsurance to analyze the strengthsand weaknesses of various optima l reins urance princip les and different methods ofdowns ide risk measurement. The n combined with the advantages of "Mean-Varia nce"princ iple and utility theory, lower partial mome nts (LPM) are used to improve therisk-adjusted profit (DRAP) model. Take layers of change loss reinsurance as theobject of the research, fully integrate the eleme nts of income and expenses of ins urerafter reins urance into the model, determine DRAP maximization as the selectioncriteria of optimal catastrophe reinsurance configuration. Then do sensitivity ana lys isfor model parameters, and construct effic ient frontier for catastrophe reins urance portfolio, verify the va lidity of the optimal configuration of catastrophe reinsurance.Next, this paper ana lys is the optima l configuratio n of a forest fire catastrophereinsura nce program for a P&C insurance compan y’s forest ins urance. Based on theassumptio n of model parameters and the definition o f forest fire catastrophe risk, useMonte Carlo s imulation to measure forest insurance’s underwriting downs ide risk andconstruct DRAP model, choose the optima l allocation in the target catastrophereinsura nce layers to determine the best retention and limitation which can ma ximizethe insurer’s DRAP. At last, analyze the reinsurance portfolio’s effic ient frontier andparameter sensitivity to achieve insurer’s optimal equilibrium between risk and profits.