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On optimal reinsurance, dividend and reinvestment strategies

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Listed author(s):
  • Meng, Hui
  • Siu, Tak Kuen

Abstract

We investigate an optimal reinsurance and dividend problem of an insurance company with the presence of reinvestments, or retained earnings. We consider the general situation that the company needs to pay both fixed and proportional costs. The object of the company is to determine reinsurance, dividend and reinvestment strategies so as to maximize the difference between the expected discounted dividends minus the expected discounted reinvestment until the time of ruin. We focus on the excess-of-loss reinsurance strategy, which is shown to be optimal. The mixed classical-impulse control is then used to discuss the problem. Using inventory control theory, the value function and optimal strategy are derived.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264-9993(10)00186-0
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 1-2 (January)
Pages: 211-218

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:1-2:p:211-218
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

Keywords: Reinvestment Reinsurance Dividend Excess-of-loss Impulse control Transaction costs;

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  1. Abel Cadenillas & Tahir Choulli & Michael Taksar & Lei Zhang, 2006. "Classical And Impulse Stochastic Control For The Optimization Of The Dividend And Risk Policies Of An Insurance Firm," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 181-202.
  2. He, Lin & Liang, Zongxia, 2008. "Optimal financing and dividend control of the insurance company with proportional reinsurance policy," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 976-983, June.
  3. T. Choulli & M. Taksar & X. Y. Zhou, 2001. "Excess-of-loss reinsurance for a company with debt liability and constraints on risk reduction," Quantitative Finance, Taylor & Francis Journals, vol. 1(6), pages 573-596.
  4. Asmussen, Soren & Taksar, Michael, 1997. "Controlled diffusion models for optimal dividend pay-out," Insurance: Mathematics and Economics, Elsevier, vol. 20(1), pages 1-15, June.
  5. Avanzi, Benjamin & U. Gerber, Hans & S.W. Shiu, Elias, 2007. "Optimal dividends in the dual model," Insurance: Mathematics and Economics, Elsevier, vol. 41(1), pages 111-123, July.
  6. Bjarne Hø jgaard & Michael Taksar, 1999. "Controlling Risk Exposure and Dividends Payout Schemes:Insurance Company Example," Mathematical Finance, Wiley Blackwell, vol. 9(2), pages 153-182.
  7. Avanzi, Benjamin & Gerber, Hans U., 2008. "Optimal Dividends in the Dual Model with Diffusion," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 38(02), pages 653-667, November.
  8. Michael I. Taksar, 2000. "Optimal risk and dividend distribution control models for an insurance company," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 51(1), pages 1-42, 02.
  9. Paulsen, Jostein & Gjessing, Hakon, 1994. "Properties of functions of the excess of loss retention limit with applications," Insurance: Mathematics and Economics, Elsevier, vol. 15(1), pages 1-21, October.
  10. Gerber, Hans U. & Smith, Nathaniel, 2008. "Optimal dividends with incomplete information in the dual model," Insurance: Mathematics and Economics, Elsevier, vol. 43(2), pages 227-233, October.
  11. repec:spr:compst:v:51:y:2000:i:1:p:1-42 is not listed on IDEAS
  12. Løkka, Arne & Zervos, Mihail, 2008. "Optimal dividend and issuance of equity policies in the presence of proportional costs," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 954-961, June.
  13. He, Lin & Liang, Zongxia, 2009. "Optimal financing and dividend control of the insurance company with fixed and proportional transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 88-94, February.
  14. Irgens, Christian & Paulsen, Jostein, 2004. "Optimal control of risk exposure, reinsurance and investments for insurance portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 35(1), pages 21-51, August.
  15. Bjarne Højgaard & Søren Asmussen & Michael Taksar, 2000. "Optimal risk control and dividend distribution policies. Example of excess-of loss reinsurance for an insurance corporation," Finance and Stochastics, Springer, vol. 4(3), pages 299-324.
  16. Bjarne Højgaard & Michael Taksar, 2004. "Optimal dynamic portfolio selection for a corporation with controllable risk and dividend distribution policy," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 315-327.
  17. de Lourdes Centeno, Maria, 2005. "Dependent risks and excess of loss reinsurance," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 229-238, October.
  18. Sheldon Lin, X. & E. Willmot, Gordon & Drekic, Steve, 2003. "The classical risk model with a constant dividend barrier: analysis of the Gerber-Shiu discounted penalty function," Insurance: Mathematics and Economics, Elsevier, vol. 33(3), pages 551-566, December.
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Cited by:

  1. Meng, Hui & Zhou, Ming & Siu, Tak Kuen, 2016. "Optimal reinsurance policies with two reinsurers in continuous time," Economic Modelling, Elsevier, vol. 59(C), pages 182-195.
  2. Guan, Huiqi & Liang, Zongxia, 2014. "Viscosity solution and impulse control of the diffusion model with reinsurance and fixed transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 109-122.
  3. Sancho Salcedo-Sanz & Leo Carro-Calvo & Mercè Claramunt & Ana Castañer & Maite Mármol, 2014. "Effectively Tackling Reinsurance Problems by Using Evolutionary and Swarm Intelligence Algorithms," Risks, MDPI, Open Access Journal, vol. 2(2), pages 1-14, April.
  4. Liang, Zhibin & Young, Virginia R., 2012. "Dividends and reinsurance under a penalty for ruin," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 437-445.
  5. Cheng, Gongpin & Zhao, Yongxia, 2016. "Optimal risk and dividend strategies with transaction costs and terminal value," Economic Modelling, Elsevier, vol. 54(C), pages 522-536.
  6. Yao, Dingjun & Yang, Hailiang & Wang, Rongming, 2014. "Optimal risk and dividend control problem with fixed costs and salvage value: Variance premium principle," Economic Modelling, Elsevier, vol. 37(C), pages 53-64.
  7. Chen, Mi & Peng, Xiaofan & Guo, Junyi, 2013. "Optimal dividend problem with a nonlinear regular-singular stochastic control," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 448-456.

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