Smoothing Financial Reinsurance: The Strategy Of Smoothen Timing Risk And Posterior Bonus

Timing risk is an accelerating risk that the time of indemnify the insureds is sooner than projected.There seems few articles exclusively focus on such a risk.So,this paper attempts to fill this gap and recommends a reinsurance structure"upper barrier limit"and"smoothing factor",thorough which the insurer can smoothen timing risk.Due to the"smoothing factor",there are two main ways to fulfill the target of smoothen timing risk.On the one hand,taking indemnification from the reinsurer,but this would result in the increase of reinsurance fee if actual indemnification amount is more than theoretical reinsurance fee.However,penalized reinsurance fee will still be less than indemnified amount.On the other hand,financing the cedent via deferred reinsurance fee.Even though deferred reinsurance fee should be return afterwards,the total amount of return is still less than the owed amount.Therefore,the aggregate capital gotten from the reinsurer in the beginning periods is more than the incurred liability,so that smoothen the timing risk.And in the end periods of reinsurance contract,reinsurer gradually retrieve the amount that on the cedent's liability side,however,these amount would be credited as reserving liability for future's indemnification.Because of the adjustment feature embedded in reinsurance structure,the reinsurer's insurance risk is dramatically restricted.Obviously,timing risk is closely related to interest rate,so this paper turns attention to guaranteed minimum interest rate in reinsurer's segregated account.To analyze Shanghai Composite Index weekly investment return,this paper utilizes the so-called regime switching model,and introduces Student's T distribution and uses bootstrapping method to estimate MSE.After modeling investment return,the paper focuses on risks related to guaranteed minimum interest rate and reinsurer's participating right to get bonus. The comparison between hedging and not-hedging showes that hedging,although incurs hedging fees every period,is superior than retaining risk and not hedging.