On the derivation of reinsurance premiums

The current thinking in the insurance circle seems to be that reinsurance premiums are determined in the market. The problem is usually analyzed with models from game theory or with a generalized version of the CAPM. This paper offers an alternative model to determine the equilibrium reinsurance premium in terms of the underlying claims faced by the ceding company and the insurance premiums collected. Using an option framework, a model for reinsurance premium is developed to aid the management of ceding companies to determine how much to pay for reinsurance. Variables that affect the reinsurance premium are identified, and their effects on the premium are examined. Numerical examples are offered to demonstrate how the model can be applied and the effects of the variables on the reinsurance premium.