RISC Scholar co-authors a study on risk preferences implied by efficient insurance contracts

Dr. Ričardas Zitikis, Associate Professor of Statistical and Actuarial Sciences and RISC Principal Scholar, has co-led research that reveals the risk preferences of the insureds and insurers under the assumption of optimality of the underlying insurance treaty

Dr. Ričardas Zitikis

Optimal (re)insurance design problems have been studied from several different perspectives. The majority of the studies have focused on optimization under specific classes of optimization criteria, quantifying the risk of decision makers, e.g., risk measures preserving second-order stochastic dominance, Value-at-Risk and Expected Shortfall (ES) risk measures, and distortion risk measures. Most of the previous literature has aimed to derive optimal forms of ceded loss functions under distinct scenarios (the choice of the insured's and insurer's risk measure, say) and constraints.

The paper, entitled "Risk measures induced by efficient insurance contracts", co-authored by Ruodu Wang, Qiuqi Wang, and Ričardas Zitikis and published in Insurance: Mathematics and Economics is arguably the first study that pursues the opposite direction to the mainstream scholarly contributions and characterizes those risk measures of the insured and the insurer that arise from the form of the Pareto-optimal contracts. It turns out that within the context of efficient contracts with deductibles, it is the mixture of the mean and the ES that arises as the risk measure of the insured and the insurer. This remarkable finding implies that the ES risk measure, which is one of the most important regulatory risk measures in finance nowadays, also plays a special role in insurance and actuarial science.