Nash equilibria in optimal reinsurance bargaining

We introduce a strategic behavior in reinsurance bilateral transactions, where agents choose the risk preferences they will appear to have in the transaction. Within a wide class of risk measures, we identify agents’ strategic choices to a range of risk aversion coefficients. It is shown that at the...

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Bibliographic Details
Published in:Insurance, mathematics & economics mathematics & economics, 2020-07, Vol.93, p.196-205
Main Authors: Anthropelos, Michail, Boonen, Tim J.
Format: Article
Language:English
Subjects:
Agents
Bargaining
Equilibrium
Game theory
Indemnity
Insurance
Nash bargaining
Nash equilibrium
Optimal reinsurance contract
Reinsurance
Risk
Risk aversion
Risk preferences
Risk-sharing games
Strategically chosen risk aversion
Transactions
Welfare
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Summary:We introduce a strategic behavior in reinsurance bilateral transactions, where agents choose the risk preferences they will appear to have in the transaction. Within a wide class of risk measures, we identify agents’ strategic choices to a range of risk aversion coefficients. It is shown that at the strictly beneficial Nash equilibria, agents appear homogeneous with respect to their risk preferences. While the game does not cause any loss of total welfare gain, its allocation between agents is heavily affected by the agents’ strategic behavior. This allocation is reflected in the reinsurance premium, while the insurance indemnity remains the same in all strictly beneficial Nash equilibria. Furthermore, the effect of agents’ bargaining power vanishes through the game procedure and the agent who gets more welfare gain is the one who has an advantage in choosing the common risk aversion at the equilibrium.
ISSN:0167-6687
1873-5959
DOI:10.1016/j.insmatheco.2020.05.001