The optimal reinsurance strategy - the individual claim case

This paper is concerned with the optimal form of reinsurance when the cedent seeks to maximize the adjustment coefficient of the retained risk (related to the probability of ultimate ruin) - which we prove to be equivalent to maximizing the expected utility of wealth, with respect to an exponential utility with a certain coefficient of risk aversion - and restricts the reinsurance strategies to functions of the individual claims, which is the case for most nonproportional treaties placed in the market. Assuming that the premium calculation principle is a convex functional we prove the existence and uniqueness of solutions and provide a necessary optimality condition (via needle-like perturbations, widely known in optimal control). These results are used to find the optimal reinsurance policy when the reinsurance loading is increasing with the variance. The optimal contract is described by a nonlinear function, of a similar form than in the aggregate case. (C) 2010 Elsevier B.V. All rights reserved.