Abstract

Risk sharing has been practiced in various forms in the financial industry. In this presentation, we propose a multi-period risk-sharing mechanism for a group of participants. The design of risk-sharing strategies is based on mean-variance optimizations of participants’ terminal reserves. Such a framework builds a connection between mean-variance optimization for portfolio selection in the finance literature and that for risk sharing in the insurance literature. Building on the most common form of reinsurance – pro-rata treaties, we propose a peer-to-peer (P2P) network for risk sharing. Assuming that multivariate losses are independent over time, we find that the optimal risk-sharing allocation exhibits a three-component structure with the long-term limit and two correction terms. This allows us to show convergence of the risk-sharing solution and the ratios of long-term reserves. We also consider the P2P risk sharing in the dynamic versus the static settings. Furthermore, we study the impact of financial fairness on various risk sharing strategies and their long-term limits. We conclude the presentation with some numerical illustrations of the key research findings. This presentation is based on joint work with Samal Abdikerimova and Runhuan Feng (UIUC).

About the speaker

Tim Boonen is an associate professor in actuarial science at the University of Hong Kong since June 1, 2023. Before, he worked as assistant and associate professor at the University of Amsterdam from 2013 until 2023. He received his Ph.D. at the Tilburg University. His research interests include mathematical finance, risk-sharing, contract theory, capital allocation, and (applications of) game theory in insurance economics. His work was published in, for instance, ASTIN Bulletin, Demography, Economic Theory, Finance and Stochastics, Insurance: Mathematics and Economics, and Journal of Mathematical Economics.