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Optimal reinsurance with a systemic surplus shock

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  • Jung, Kwangmin
  • Park, Seyoung

Abstract

We examine the optimal reinsurance and asset allocation strategies for an insurer who minimizes the ruin probability and faces a systemic surplus shock. Analytically tractable solutions are obtained when this shock occurs at an uncertain time. We then demonstrate that the systemic surplus shock results in a nonstandard form of market incompleteness, which alters both qualitative and quantitative features of existing strategies without the surplus shock. In particular, a specific form of the marginal value for the insurer’s minimized ruin probability plays a key role in the characterization of optimal policies with the systemic surplus shock.

Suggested Citation

  • Jung, Kwangmin & Park, Seyoung, 2024. "Optimal reinsurance with a systemic surplus shock," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s016517652400497x
    DOI: 10.1016/j.econlet.2024.112013
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    References listed on IDEAS

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    4. Alain Bensoussan & Bong-Gyu Jang & Seyoung Park, 2016. "Unemployment Risks and Optimal Retirement in an Incomplete Market," Operations Research, INFORMS, vol. 64(4), pages 1015-1032, August.
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    More about this item

    Keywords

    Reinsurance; Asset allocation; Systemic risk; Ruin probability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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