Empirical study on optimal reinsurance for crop insurance in China from an insurer's perspective

Abstract

This study investigates the optimal reinsurance for crop insurance in China in an insurer's perspective using the data from Inner Mongolia, Jilin, and Liaoning, China. On the basis of the loss ratio distributions modeled by AnHua Crop Risk Evaluation System, we use the empirical model developed by Tan and Weng (2014) to study the optimal reinsurance design for crop insurance in China. We find that, when the primary insurer's loss function, the principle of the reinsurance premium calculation, and the risk measure are given, the level of risk tolerance of the primary insurer, the safety loading coefficient of the reinsurer, and the constraint on reinsurance premium budget affect the optimal reinsurance design. When a strict constraint on reinsurance premium budget is implemented, which often occurs in reality, the limited stop loss reinsurance is optimal, consistent with the common practice in reality. This study provides suggestions for decision making regarding the crop reinsurance in China. It also provides empirical evidence for the literature on optimal reinsurance from the insurance market of China. This evidence undoubtedly has an important practical significance for the development of China's crop insurance.

Keywords

• optimal reinsurance
• crop insurance
• limited stop loss reinsurance