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Optimal investment and reinsurance policies in insurance markets under the effect of inside information

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  • I.D. Baltas
  • N.E. Frangos
  • A.N. Yannacopoulos

Abstract

In this paper, we study the problem of optimal investment and proportional reinsurance coverage in the presence of inside information. To be more precise, we consider two firms: an insurer and a reinsurer who are both allowed to invest their surplus in a Black–Scholes‐type financial market. The insurer faces a claims process that is modeled by a Brownian motion with drift and has the possibility to reduce the risk involved with this process by purchasing proportional reinsurance coverage. Moreover, the insurer has some extra information at her disposal concerning the future realizations of her claims process, available from the beginning of the trading interval and hidden from the reinsurer, thus introducing in this way inside information aspects to our model. The optimal investment and proportional reinsurance decision for both firms is determined by the solution of suitable expected utility maximization problems, taking into account explicitly their different information sets. The solution of these problems also determines the reinsurance premia via a partial equilibrium approach. Copyright © 2011 John Wiley & Sons, Ltd.

Suggested Citation

  • I.D. Baltas & N.E. Frangos & A.N. Yannacopoulos, 2012. "Optimal investment and reinsurance policies in insurance markets under the effect of inside information," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 28(6), pages 506-528, November.
    • Handle: RePEc:wly:apsmbi:v:28:y:2012:i:6:p:506-528
    DOI: 10.1002/asmb.925
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    Cited by:

    1. Peng, Xingchun & Wang, Wenyuan, 2016. "Optimal investment and risk control for an insurer under inside information," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 104-116.
    2. Yan, Ming & Peng, Fanyi & Zhang, Shuhua, 2017. "A reinsurance and investment game between two insurance companies with the different opinions about some extra information," Insurance: Mathematics and Economics, Elsevier, vol. 75(C), pages 58-70.
    3. Peng, Xingchun & Chen, Fenge & Wang, Wenyuan, 2021. "Robust optimal investment and reinsurance for an insurer with inside information," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 15-30.
    4. Peng, Xingchun & Hu, Yijun, 2013. "Optimal proportional reinsurance and investment under partial information," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 416-428.

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