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Optimal reinsurance to minimize the discounted probability of ruin under ambiguity

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  • Li, Danping
  • Young, Virginia R.

Abstract

We solve an optimal robust reinsurance problem for an ambiguity-averse insurer, who worries about ambiguity in the rate of claim occurrence and who develops an optimal robust reinsurance strategy to minimize the penalized discounted probability of ruin, in which we discount for the time of ruin. Specifically, we minimize the expectation of e−δτ1{τ<∞}, in which τ equals the time of ruin and δ measures the insurer’s time value. Moreover, we penalize this expectation with an entropic term that accounts for the insurer’s ambiguity concerning the claim rate.

Suggested Citation

  • Li, Danping & Young, Virginia R., 2019. "Optimal reinsurance to minimize the discounted probability of ruin under ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 87(C), pages 143-152.
    • Handle: RePEc:eee:insuma:v:87:y:2019:i:c:p:143-152
    DOI: 10.1016/j.insmatheco.2019.04.009
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    References listed on IDEAS

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    Cited by:

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    2. Linlin Tian & Lihua Bai, 2020. "Minimizing the Ruin Probability under the Sparre Andersen Model," Papers 2004.08124, arXiv.org.
    3. Li, Cunfang & Zhang, Bo & Lai, Yongzeng & Dong, Mei & Li, Danping, 2019. "Does the trans-regional transfer of resource-oriented enterprises generate a stress effect?," Resources Policy, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Reinsurance; Ruin probability; Ambiguity; Mean–variance premium principle; Robust optimization; Diffusion approximation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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