Methodological principles and formalization of the stability achievement process at the reinsurance market

Economic Annals-ХХI: Volume 140, Issue 3-4(2), Pages: 63-66

Citation information:
Kuzmenko, O. (2014). Methodological principles and formalization of the stability achievement process at the reinsurance market. Economic Annals-XXI, 3-4(2), 63-66. http://ea21journal.world/index.php/ea-v140-16/


Olha Kuzmenko
PhD (Economics),
Associate Professor,
Ukrainian Academy of Banking of The National Bank of Ukraine
57 Petropavlivska Str., Sumy, 40030, Ukraine
okuzmenko84@mail.ru

Methodological principles and formalization of the stability achievement process at the reinsurance market

Abstract. Introduction. The global economic system demands effective mechanisms to prevent and minimize various risks. So, the progressive international tendencies of national economics lead to the consideration of the mechanism, which allows, not disrupting the entrepreneurship market, neutralizing the negative consequences of adverse events with the means of reinsurance market. Therefore, the purpose of the article is to research methodological and formalization aspects of the stability achievement process at the reinsurance market. Methods. Methodological basis of the study are fundamental tendencies of the finance and insurance theory, modern insurance management concepts.

Results. The article is devoted to the essential characteristics and mathematical formalization of reinsurance market stability as a dynamic process of the stable distribution formation between two sets of subjects at this market: the subjects who transfer risk for reinsurance, and the subjects who take risk for reinsurance. The practical implementation of the proposed approach is carried out with the usage of Gale-Shapley algorithm («pending approval algorithm»), adjusted to the peculiarities of reinsurance market functioning on the sample of four insurance companies (Munich Reinsurance Co., Swiss Reinsurance Co., Berkshire Hathaway Re., Hannover Rueckversicherung AG), to the share of which 55.51% of the global reinsurance market assets fall. Stable distribution determines conclusion and compliance with the conditions of reinsurance contracts between the subjects pairs at the reinsurance market, which is the conclusion of agreements, which can provide: cover of losses in full; implementation of insurance payments or the obligations execution within permissible limits; optimizing the profitability of insurers and reinsurers due to the compromise solution in the context of tariff rate and insurance reserves. On the basis of calculations, stable distribution of the subjects in the reinsurance market for the period 2010-2012 provides for companies Munich Reinsurance Co. and Berkshire Hathaway Re. reinsurance their risks in 2010 in Berkshire Hathaway Re and Munich Reinsurance Co., respectively, and change reinsurance company on Hannover Rueckversicherung AG (respectively, on Swiss Reinsurance Co.) in the next two years. For companies Swiss Reinsurance Co. and Hannover Rueckversicherung AG the stable distribution is possible at a variation of the reinsurer in 2010 on Hannover Rueckversicherung AG (respectively, Swiss Reinsurance Co.), in 2011 – on Munich Reinsurance Co. (respectively, Berkshire Hathaway Re.), in 2012 – on Berkshire Hathaway Re. (respectively, Munich Reinsurance Co).

Conclusion. Methodological principles and formalization of the stability achievement process at the reinsurance market allowed defining the stability of the reinsurance market, exploring its stable distribution on the basis of Gale-Shapley algorithm («pending approval algorithm»), identify the main principles of its formation, and realize its practical implementation on the Sample of four insurance companies (Munich Reinsurance Co., Swiss Reinsurance Co., Berkshire Hathaway Re., Hannover Rueckversicherung AG). The stable distribution provides the following key aspects: full covering of losses, making insurance payments or performance of obligations within permissible limits; optimizing the profitability of insurers and reinsurers due to the compromise decision.

Keywords: Reinsurance Market; Market Stability; Stable Distribution

JEL Classification: B41; C61; C62; G22

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Received 28.02.2014