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
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables
By Hipòlit Torró, Vicente Meneu, ...
-
Information, Trading and Volatility: Evidence from Weather-Sensitive Markets
By Jeff Fleming, Chris Kirby, ...
-
Do Asset Prices Reflect Fundamentals? Freshly Squeezed Evidence from the Oj Market
By Jacob Boudoukh, Matthew P. Richardson, ...
-
Do Asset Prices Reflect Fundamentals? Freshly Squeezed Evidence from the Oj Market
By Jacob Boudoukh, Matthew P. Richardson, ...
-
Do Asset Prices Reflect Fundamentals?
By Jacob Boudoukh, Yuqing Shen, ...
-
Do Asset Prices Reflect Fundamentals? Freshly Squeezed Evidence from the Oj Market
By Jacob Boudoukh, Matthew P. Richardson, ...
-
Do Asset Prices Reflect Fundamentals? Freshly Squeezed Evidence from the Oj Market
By Jacob Boudoukh, Matthew P. Richardson, ...