PORTFOLIO OPTIMIZATION

BY RENI~ SCHNIEPER
Zurich hlsurance Company, Reinsurance

KEYWORDS
Reinsurance, retentions, non linear optimization, insurance risk, financial
risk, Markowitz's portfolio selection method, CAPM.

Based on the profit and loss account of an insurance company we derive a
probabilistic model for the financial result of the company, thereby both assets and liabilities are marked to market. We thus focus on the economic value of the company.

We first analyse the underwriting risk of the company. The maximization of the risk return ratio of the company is derived as optimality criterion.  It is shown how the risk return ratio of heterogeneous portfolios or of  catastrophe exposed portfolios can be dramatically improved through reinsurance. The improvement of the risk return ratio through portfolio diversification is also analysed.