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Optimal premium policy of an insurance firm: Full and partial information

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  • Huang, Jianhui
  • Wang, Guangchen
  • Wu, Zhen

Abstract

Herein, we study the optimization problem faced by an insurance firm who can control its cash-balance dynamics by adjusting the underlying premium rate. The firm's objective is to minimize the total deviation of its cash-balance process to some pre-set target levels by selecting an appropriate premium policy. Our problem is totally new and has three distinguishable features: (1) both full and partial information cases are investigated here; (2) the state is subject to terminal constraint; (3) a forward-backward stochastic differential equation formulation is given which is more systematic and mathematically advanced. This formulation also enables us to continue further research in a generalized stochastic recursive control framework (see Duffie and Epstein (1992), El Karoui et al. (2001), etc.). The optimal premium policy with the associated optimal objective functional are completely and explicitly derived. In addition, a backward separation technique adaptive to forward-backward stochastic systems with the state constraint is presented as an efficient and convenient alternative to the traditional Wonham's (1968) separation principle in our partial information setup. Some concluding remarks are also given here.

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  • Huang, Jianhui & Wang, Guangchen & Wu, Zhen, 2010. "Optimal premium policy of an insurance firm: Full and partial information," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 208-215, October.
    • Handle: RePEc:eee:insuma:v:47:y:2010:i:2:p:208-215
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    Cited by:

    1. Shihao Zhu & Jingtao Shi, 2019. "Optimal Reinsurance and Investment Strategies under Mean-Variance Criteria: Partial and Full Information," Papers 1906.08410, arXiv.org, revised Jun 2020.
    2. Xing, Jie & Ma, Jingtang & Yang, Wensheng, 2023. "Optimal entry decision of unemployment insurance under partial information," Insurance: Mathematics and Economics, Elsevier, vol. 110(C), pages 31-52.
    3. Na Li & Yuan Wang & Zhen Wu, 2018. "An Indefinite Stochastic Linear Quadratic Optimal Control Problem with Delay and Related Forward–Backward Stochastic Differential Equations," Journal of Optimization Theory and Applications, Springer, vol. 179(2), pages 722-744, November.
    4. Wu, Zhen & Zhuang, Yi, 2018. "Linear-quadratic partially observed forward–backward stochastic differential games and its application in finance," Applied Mathematics and Computation, Elsevier, vol. 321(C), pages 577-592.

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