Sharpe Ratio Optimization of an Excess of Loss Reinsurance Contract

Effects of the sharing and layering of losses by means of an excess of loss reinsurance contract are examined. In particular, the covariance of loss at any given position across the layers of an excess of loss reinsurance contract as a function of the first and second moments of the frequency and individual layer loss distributions is derived. Based on this result, a risk management application is presented and the Sharpe Ratio based investment equivalent paradigm for measuring profitability is explored.

Keywords: Reinsurance