Kreps Investment Equivalent Reinsurance Pricing
Kreps Investment Equivalent Reinsurance Pricing
Kreps’ investment-equivalent approach provides a theoretically sound framework for pricing reinsurance contracts. It moves beyond traditional actuarial methods based primarily on expected losses and adds a crucial layer of risk aversion and market consistency. The core idea is to determine the cost of the reinsurance contract such that the reinsurer is indifferent between accepting the contract and investing its capital in a financial market with comparable risk and return characteristics.