Pricing catastrophe reinsurance under the standard deviation premium principle

Wen Chao; Wen Chao

doi:10.3934/math.2022249

AIMS Mathematics

2022, Volume 7, Issue 3: 4472-4484. doi: 10.3934/math.2022249

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Research article

Pricing catastrophe reinsurance under the standard deviation premium principle

Wen Chao ^,

School of Management, Fujian University of Technology, Fuzhou 350108, China

Received: 22 September 2021 Revised: 16 December 2021 Accepted: 19 December 2021 Published: 22 December 2021
MSC : 62P05, 62M20

Catastrophe reinsurance is an important way to prevent and resolve catastrophe risks. As a consequence, the pricing of catastrophe reinsurance becomes a core problem in catastrophic risk management field. Due to the severity of catastrophe loss, the Peak Over Threshold (POT) model in extreme value theory (EVT) is extensively applied to capture the tail characteristics of catastrophic loss distribution. However, there is little research available on the pricing formula of catastrophe excess of loss (Cat XL) reinsurance when the catastrophe loss is modeled by POT. In the context of POT model, we distinguish three different relations between retention and threshold, and then prove the explicit pricing formula respectively under the standard deviation premium principle. Furthermore, we fit POT model to the earthquake loss data in China during 1990–2016. Finally, we give the prices of earthquake reinsurance for different retention cases. The computational results illustrate that the pricing formulas obtained in this paper are valid and can provide basis for the pricing of Cat XL reinsurance contracts.
- standard deviation premium principle,
- catastrophe reinsurance,
- POT model,
- pricing,
- excess-of-loss reinsurance
Citation: Wen Chao. Pricing catastrophe reinsurance under the standard deviation premium principle[J]. AIMS Mathematics, 2022, 7(3): 4472-4484. doi: 10.3934/math.2022249

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Abstract

Catastrophe reinsurance is an important way to prevent and resolve catastrophe risks. As a consequence, the pricing of catastrophe reinsurance becomes a core problem in catastrophic risk management field. Due to the severity of catastrophe loss, the Peak Over Threshold (POT) model in extreme value theory (EVT) is extensively applied to capture the tail characteristics of catastrophic loss distribution. However, there is little research available on the pricing formula of catastrophe excess of loss (Cat XL) reinsurance when the catastrophe loss is modeled by POT. In the context of POT model, we distinguish three different relations between retention and threshold, and then prove the explicit pricing formula respectively under the standard deviation premium principle. Furthermore, we fit POT model to the earthquake loss data in China during 1990–2016. Finally, we give the prices of earthquake reinsurance for different retention cases. The computational results illustrate that the pricing formulas obtained in this paper are valid and can provide basis for the pricing of Cat XL reinsurance contracts.

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