Reinsurance Retention Levels for Property/Liability Firms: A Managerial Portfolio Selection Framework

A managerial portfolio selection model is presented that analyzes the reinsurance decision of the ceding insurer. Alternative goal functions for management are assumed and then comparative statistics, as well as illustrative numerical examples, are used to develop testable implications concerning the optimal proportional reinsurance retention level for property-liability insurance firms. It is noted that insurance lines that are positively correlated with the asset market are most desirable because the model incorporates a risky asset (the market) and a risky liability (the portfolio of policies) rather than 2 risky assets. The optimal reinsurance proportion is analyzed to determine its sensitivity to a number of different factors.