Past exam of the mathematics course of the University of Cambridge / 2015 / iii / Paper 34 / 2 / a

The expected value and variance under quota share reinsurance follow by scaling the exponential distribution:The retained stop loss moments for an exponential aggregate follow from the payout $Y=\min (S,M)$, its survival function equals $e^{-x/{\mu }_S}$ for $0\le x<M$ and zero for $x\ge M$. The tail integral formula for moments gives, with $m=M/{\mu }_S$ and $r=e^{-m}$,Consequently the retained moments areMatching the two expected values forces $\alpha =1-r$, which lies strictly between zero and one. The difference of the variances simplifies toIndeed $h(m)=m-1+e^{-m}$ has $h(0)=0$ and $h^{\prime }(m)=1-e^{-m}\ge 0$ for $m\ge 0$. Because $M>0$, the difference is actually positive. At equal retained expected value, aggregate stop loss reinsurance reduces the variance more than quota share reinsurance.