An Analysis of Reinsurance Optimisation in Life Insurance - Working Paper

This paper considers optimal reinsurance based on an assessment of the reinsurance
arrangements for a large life insurer. The objective is to determine the reinsurance
structure, based on actual insurer data, using a modified mean-variance
criteria that maximises the retained premiums and minimizes the variance of retained
claims while keeping the retained risk exposure constant, assuming a given
level of risk appetite. The portfolio of life and disability policies use quota-share,
surplus and a combination of both quota-share and surplus reinsurance. Alternative
reinsurance arrangements are compared using the modified mean-variance
criteria to assess the optimal reinsurance strategy. The analysis takes into account
recent claims experience as well as actual premiums paid by insured lives and to
the reinsurers. Optimal reinsurance cover depends on many factors including retention
levels, premiums and the variance of sum insured values (and therefore
claims), as a result an insurer should assess the tradeoff between retained premiums
and the variance of retained claims based on its own experience and risk appetite.