Retention for Stoploss reinsurance to minimize VaR in compound Poisson-Lognormal distribution

Abstract

Automobile insurance is one of the emerging general insurance’s product in Indonesia. Fluctuation in total premium revenues and total claim expenses leads to a risk that insurance company can not be able to pay consumer’s claims, thus reinsurance is needeed. Reinsurance is a risk transfer mechanism from the insurance company to another company called reinsurer, one of the reinsurance type is Stoploss. Because reinsurer charges premium to the insurance company, it is important to determine the retention or the total claims to be retain solely by the insurance company. Thus, retention is determined using Value at Risk (VaR) which minimize the total risk of the insurance company in the presence of Stoploss reinsurance. Retention depends only on the distribution of total claims and reinsurance loading factor. We use the compound Poisson distribution and the Log-Normal Distribution to illustrate the retention value in a collective risk model.