Reducing the Possibility of Ruin by Maximizing the Survival Function for the Insurance Company’s Portfolio

In this paper, the intention was to reduce the possibility of ruin in the insurance company by maximizing its survival function. This paper uses a perturbed classical risk process as the basic model. The basic model was later compounded by refinancing and return on investment. The Hamilton–Jacobi–Bellman equation and integro‐differential equation of Volterra type were obtained. The Volterra integro‐differential equation for the survival function of the insurance company was converted to a third‐order ordinary differential equation which was later converted into a system of first‐order ordinary differential equations. This system was then solved numerically using the fourth‐order Runge‐Kutta method. The results show that the survival function increases with the increase in the intensity of the counting process but decreases with an increase in the instantaneous rate of stock return and return volatility. This is due to the fact that the insurance company faces more risk. Thus, this paper suggests that in this situation, more investments should be made in risk‐free assets.