Optimal Safety Loading Based the VaR and CTE Risk Measures from the Insurer’s Perspective

This paper delves into the determination of the optimal safety loading that an insurer ought to incorporate into reinsurance pricing. The authors base the proposed analysis on the assumption that the insurer utilizes a specific form of the loss function and is confronted with losses that adhere to a zero-corrected exponential distribution. This assumption is steered by the expected premium principle. By minimizing the Value at Risk (VaR) of the insurer’s liabilities and the Conditional Tail Expectation (CTE) risk measures, the proposed research investigates the optimal safety loading principle for reinsurance premiums. This approach aims to curtail the potential losses that are associated with the insurer’s premiums. The research outcomes reveal that the results obtained from the VaR and CTE risk measures bear substantial significance in the real-world insurance and reinsurance markets.