Robust Risk Control with Reinsurance and CAT Bonds
Year: 2024
Type: article
Abstract: This research studies robust risk control policies for an ambiguity-averse insurer. The insurer can manage its risk exposure through the purchase of reinsurance and the issuance of catastrophe bonds (CAT bonds) which are linked to an exogenous trigger index. The insurer worries about the veracity of the model and seeks to develop a robust strategy to minimize the discounted ruin probability. We allow the insurer to exhibit different levels of ambiguity aversion towards its own claims and the trigger index. By employing a robust control approach, we analytically derive the optimal risk control policies which provide the insurer with guidelines on how to effectively manage its risk in an ambiguous environment. We present numerical examples that showcase scenarios in which CAT bonds can be utilized as an effective risk mitigation tool. Furthermore, we assess the potential welfare losses that could arise if the insurer fails to account for model uncertainty or lacks the ability to issue CAT bonds.
Source: North American Actuarial Journal
Authors: Yongwu Li, Pengyu Wei
Language: English
Topic: Probability and Risk Models
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
Award: 基于网络生态的智慧供应链金融模式研究
OpenAlex ID: W4402164974