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ALM for insurers with multiple underwriting lines and portfolio constraints: a Lagrangian duality approach

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  • Rafael Serrano
  • Camilo Castillo

Abstract

We study a continuous-time asset-allocation problem for an insurance firm that backs up liabilities from multiple non-life business lines with underwriting profits and investment income. The insurance risks are captured via a multidimensional jump-diffusion process with a multivariate compound Poisson process with dependent components, which allows to model claims that occur in different lines simultaneously. Using Lagrangian convex duality techniques, we provide a general verification-type result for investment-underwriting strategies that maximize expected utility from the dividend payout rate and final wealth over a finite-time horizon. We also study the precautionary effect on earnings retention of risk aversion, prudence, portfolio constraints and multivariate insurance risk. We find an explicit characterization of optimal strategies under CRRA preferences. Numerical results for two-dimensional examples with policy limits illustrate the impact of co-integration for ALM with multiple (dependent and independent) sources of insurance risk.

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  • Rafael Serrano & Camilo Castillo, 2018. "ALM for insurers with multiple underwriting lines and portfolio constraints: a Lagrangian duality approach," Papers 1810.08466, arXiv.org, revised Aug 2021.
    • Handle: RePEc:arx:papers:1810.08466
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    References listed on IDEAS

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