Optimal Reinsurance Analysis from a Crop Insurer's Perspective

Published on Agricultural Finance Review 73(2), 310-328, 2013.

29 Pages Posted: 26 Apr 2014

See all articles by Lysa Porth

Lysa Porth

University of Manitoba - Warren Centre for Actuarial Studies and Research; University of Waterloo - Department of Statistics and Actuarial Science; University of Manitoba - Department of Agribusiness and Agricultural Economics

Ken Seng Tan

University of Waterloo

Chengguo Weng

University of Waterloo; University of Waterloo - Department of Statistics and Actuarial Science

Date Written: October 26, 2012

Abstract

Purpose - The primary objective of this paper is to analyze the optimal reinsurance contract structure from the crop insurer’s perspective.

Design/Methodology/Approach - A very powerful and flexible empirical-based reinsurance model is used to analyze the optimal form of the reinsurance treaty. The reinsurance model is calibrated to unique data sets including private reinsurance experience for Manitoba, and loss cost ratio experience for all of Canada, under the assumption of the standard deviation premium principle and conditional tail expectation risk measure.

Findings - The Vasicek distribution is found to provide the best statistical fit for the Canadian LCR data, and the empirical reinsurance model stipulates that a layer reinsurance contract structure is optimal, which is consistent with market practice.

Research Limitations/Implications - While the empirical reinsurance model is able to reproduce the optimal shape of the reinsurance treaty, the model produces some inconsistencies between the implied and observed attachment points. Future research will continue to explore the reinsurance model that will best recover the observed market practice.

Practical Implications - Private reinsurance premiums can account for a significant portion of a crop insurer’s budget, therefore, this study should be useful for crop insurance companies to achieve efficiencies and improve their risk management.

Originality/Value - To the best of our knowledge, this is the first paper to show how a crop insurance firm can optimally select a reinsurance contract structure that minimizes its total risk exposure, considering the total losses retained by the insurer, as well as the reinsurance premium paid to private reinsurers.

Keywords: crop insurance; optimal reinsurance; conditional tail expectation risk measure; premium principle; loss cost ratio

Suggested Citation

Porth, Lysa and Porth, Lysa and Tan, Ken Seng and Weng, Chengguo, Optimal Reinsurance Analysis from a Crop Insurer's Perspective (October 26, 2012). Published on Agricultural Finance Review 73(2), 310-328, 2013., Available at SSRN: https://ssrn.com/abstract=2428800

Lysa Porth

University of Waterloo - Department of Statistics and Actuarial Science ( email )

Waterloo, Ontario N2L 3G1
Canada

University of Manitoba - Warren Centre for Actuarial Studies and Research ( email )

638 Drake Centre, 181 Freedman Crescent
Winnipeg, MB R3T 2N2
Canada

University of Manitoba - Department of Agribusiness and Agricultural Economics ( email )

Winnipeg, MB, R3T 2N2
Canada

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Chengguo Weng (Contact Author)

University of Waterloo ( email )

M3-200 Univ Ave W
Waterloo, Ontario N2L3G1
Canada
(1)888-4567 ext.31132 (Phone)

University of Waterloo - Department of Statistics and Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Croatia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
68
Abstract Views
562
Rank
603,784
PlumX Metrics