A Research On Optimal Reinsurance Strategy Of Catastrophe Reinsurance Sidecar Based On POT Model

The world has entered an era of frequent catastrophes with the deterioration of the ecological environment.In the face of increasing disaster losses,countries have begun to actively seek effective catastrophe risk management methods.Insurance and reinsurance have gradually become developed countries’main means to compensate for disaster losses.The development of China’s insurance market lags behind that of developed countries.When facing with severe natural disasters,we often rely on government assistance and social donations.Insufficient catastrophe insurance coverage has become a major problem in catastrophe risk management.As an important supplement for insurance companies,reinsurance has shared some pressure of indemnities after the catastrophe.However,in the face of large claims,the operation of reinsurance companies will also be impacted,and they also face the problem of insufficient reinsurance supply due to insufficient funds.At this time,catastrophe reinsurance sidecar is produced.Sidecar is an innovative tool for catastrophe risk management proposed in the international market.It’s established by reinsurance companies looking for investors in the capital market and funded by capital market investors.And the reinsurance company divides part of the catastrophe risk as well as profits to sidecar.At this time,the reinsurance company can obtain a higher level of underwriting capacity.Firstly,this paper explain the operating mechanism,basic principles and development prospects of sidecar.Secondly,we put forward a theoretical model for the reinsurance strategy of sidecar with the optimal reinsurance problem.We use the Peak Over Threshold model(POT model)to fit the distribution of global natural disaster insurance losses and obtain the excess loss expectation.Then on one hand,we derive the profit function of the reinsurance company and take the profit maximization of the reinsurance company as the objective function.On the other hand,we borrow the information ratio of the fund performance measurement index,and set the ratio of sidecar to be greater than zero as the constraint condition.After that,we search the global catastrophe insurance loss data in the sigma published by the Swiss Reinsurance Company and conduct empirical research on the above model.This paper finally concludes that the reinsurance strategy of catastrophe reinsurance sidecar is affected by the capital invested by investors,the market share of catastrophe insurance of the reinsurance company and the additional safety factor.In particular,assuming that the investor invests US$47.29 million in capital,the global catastrophe reinsurance market share of the researched reinsurance company is 1%and the safety additional factor is 0.5,the optimal reinsurance ratio for sidecar is 12.74%.Finally,we can get the conclusions,and give some suggestions on the development of sidecar and catastrophe insurance market in China.