Endogenous Reinsurance Pricing in Large Competitive Insurance Markets: Finite-Player and Mean Field Analysis

2026-06-25

AI Summary

This study investigates the endogenous determination of reinsurance pricing in a competitive insurance market, characterizing the strategic interactions between a reinsurer and a heterogeneous population of insurers, along with the feedback effects arising from their common risk exposure. Within a Stackelberg game framework, the reinsurer acts as the leader by setting a uniform premium rate and investment strategy, while insurers endogenously choose their risk retention levels based on individual performance, relative performance concerns, and shared noise. The work innovatively uncovers a threshold structure and spillover mechanism in risk retention driven by relative performance motives, establishes for the first time the convergence of finite-player equilibria under non-unique mean-field equilibria, and introduces an efficient threshold continuation algorithm. Numerical experiments demonstrate that relative performance concerns significantly amplify systemic spillovers and can induce multiple Stackelberg equilibria, while also revealing a three-stage behavioral pattern—from full reinsurance to full retention—as premiums vary.

Abstract

We study endogenous reinsurance pricing in a competitive insurance market with one strategic reinsurer and many heterogeneous insurers. The reinsurer acts as a Stackelberg leader by choosing a common premium rate and an investment strategy, while insurers decide how much risk to retain and how to invest, taking into account their own performance, their performance relative to the insurer population, and common insurance-claim and financial-market noise. This creates a feedback loop absent from standard reinsurance models with exogenous premiums: a premium change affects insurers directly through the cost of reinsurance, and indirectly through the population's aggregate exposure to common insurance-claim risk. For a fixed premium, we characterize the insurers' equilibrium retention through a scalar fixed point and establish its monotone premium response. This characterization reveals a spillover mechanism generated by relative performance concerns and leads to a threshold structure in which insurers move from full cession to partial retention and then to full retention as the premium increases. Using this structure, we reduce the reinsurer's premium problem to a one-dimensional optimization over a compact premium interval and characterize Stackelberg equilibria in both finite-player and mean field models. In the finite-player case, we develop an efficient threshold continuation procedure that determines equilibrium premiums without enumerating all retention configurations. We also prove convergence from finite-player equilibria to mean field equilibria without requiring the mean field equilibrium premium to be unique. Numerical illustrations show how relative performance concerns amplify spillover effects and can induce retention even when reinsurance remains actuarially favorable. They also demonstrate that Stackelberg equilibria need not be unique in either setting.

Problem

• endogenous reinsurance pricing
• competitive insurance market
• Stackelberg equilibrium
• relative performance concerns
• spillover effects

Innovation

• endogenous reinsurance pricing
• Stackelberg equilibrium
• mean field game
• relative performance concerns
• threshold structure