Session: 07

General Reinsurance

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Summary

We present a class of new reinsurance covers with features similar to Bermudan options popular in the financial industry. The insurer can buy, say, a cover which will pay the claims emanating during a fixed time interval within one year. For example, the insurer has the right to exercise an option at the end of any month. The reinsurer will then pay the claims of that month and the contract expires.

If the covered claim interval is very short, for instance only a few days, then the cover works similar to a catastrophe treaty except that there is always a payout since at the end of the year it is rational for the option holder to exercise. On the other hand, if the period agreed on is long, say one full year in the extreme case, the contract collapses to a traditional reinsurance cover. Hence, the cover provides for a very flexible tool to optimize existing reinsurance programs.

We derive the optimal strategy the insurer will have to pursue to decide on when to exercise the option. To determine the net--premium of the cover, we use the techniques of dynamic programming and derive explicit recursive solution schemes for a variety of problems and general claim distributions.

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