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Irreversible reinsurance: minimization of capital injections in presence of a fixed cost

Author

Listed:
  • Salvatore Federico

    (Università di Bologna)

  • Giorgio Ferrari

    (Bielefeld University)

  • Maria-Laura Torrente

    (Università di Genova)

Abstract

We propose a model in which, in exchange to the payment of a fixed transaction cost, an insurance company can choose the retention level as well as the time at which subscribing a perpetual reinsurance contract. The surplus process of the insurance company evolves according to the diffusive approximation of the Cramér-Lundberg model, claims arrive at a fixed constant rate, and the distribution of their sizes is general. Furthermore, we do not specify any particular functional form of the retention level. The aim of the company is to take actions in order to minimize the sum of the expected value of the total discounted flow of capital injections needed to avoid bankruptcy and of the fixed activation cost of the reinsurance contract. We provide an explicit solution to this problem, which involves the resolution of a static nonlinear optimization problem and of an optimal stopping problem for a reflected diffusion. We then illustrate the theoretical results in the case of proportional and excess-of-loss reinsurance, by providing a numerical study of the dependency of the optimal solution with respect to the model’s parameters.

Suggested Citation

  • Salvatore Federico & Giorgio Ferrari & Maria-Laura Torrente, 2024. "Irreversible reinsurance: minimization of capital injections in presence of a fixed cost," Mathematics and Financial Economics, Springer, volume 18, number 6, December.
    • Handle: RePEc:spr:mathfi:v:18:y:2024:i:4:d:10.1007_s11579-024-00373-z
    DOI: 10.1007/s11579-024-00373-z
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    References listed on IDEAS

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    1. Julia Eisenberg & Hanspeter Schmidli, 2011. "Minimising expected discounted capital injections by reinsurance in a classical risk model," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2011(3), pages 155-176.
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