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Optimal dividends and ALM under unhedgeable risk

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  • Pelsser, Antoon A.J.
  • Laeven, Roger J.A.

Abstract

In this paper we develop a framework for optimal investment decisions for insurance companies in the presence of (partially) unhedgeable risk. The perspective that we choose is from an insurance company that maximises the stream of dividends paid to its shareholders. The policy instruments that the company has are the dividend policy and the investment policy. Using stochastic control theory, we derive simultaneously the optimal investment policy and the optimal dividend policy, taking the insurance risks to be given. We study the trade off between investing in the optimal hedge portfolio and the fully diversified portfolio. We show next how the pricing of unhedgeable risk can also be embedded in our framework. Finally, we derive the distribution of the time of bankruptcy and demonstrate its usefulness in calibrating the model.

Suggested Citation

  • Pelsser, Antoon A.J. & Laeven, Roger J.A., 2013. "Optimal dividends and ALM under unhedgeable risk," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 515-523.
    • Handle: RePEc:eee:insuma:v:53:y:2013:i:3:p:515-523
    DOI: 10.1016/j.insmatheco.2013.07.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal dividends; ALM; Unhedgeable risk; Stochastic control theory; HJB equation;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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