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Optimal reinsurance under multiple attribute decision making

Published online by Cambridge University Press:  17 November 2015

Başak Bulut Karageyik
Affiliation:
Department of Actuarial Science, Hacettepe University, 06800 Beytepe, Ankara, Turkey
David C.M. Dickson*
Affiliation:
Department of Economics, Centre for Actuarial Studies, University of Melbourne, VIC 3010, Australia
*
*Correspondence to: David C.M. Dickson, Department of Economics, Centre for Actuarial Studies, University of Melbourne, VIC 3010, Australia. Tel: +61 3 8344 4727; Fax: +61 3 8344 6899; E-mail: dcmd@unimelb.edu.au

Abstract

We apply methods from multiple attribute decision making (MADM) to the problem of selecting an optimal reinsurance level. In particular, we apply the Technique for Order of Preference by Similarity to Ideal Solution method with Mahalanobis distance. We consider the classical risk model under a reinsurance arrangement – either excess of loss or proportional – and we consider scenarios that have the same finite time ruin probability. For each of these scenarios we calculate three quantities: released capital, expected profit and expected utility of resulting wealth. Using these inputs, we apply MADM to find optimal retention levels. We compare and contrast our findings with those when decisions are based on a single attribute.

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Papers
Copyright
© Institute and Faculty of Actuaries 2015 

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