IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v28y2011i1p211-218.html
   My bibliography  Save this article

On optimal reinsurance, dividend and reinvestment strategies

Author

Listed:
  • Meng, Hui
  • Siu, Tak Kuen

Abstract

We investigate an optimal reinsurance and dividend problem of an insurance company with the presence of reinvestments, or retained earnings. We consider the general situation that the company needs to pay both fixed and proportional costs. The object of the company is to determine reinsurance, dividend and reinvestment strategies so as to maximize the difference between the expected discounted dividends minus the expected discounted reinvestment until the time of ruin. We focus on the excess-of-loss reinsurance strategy, which is shown to be optimal. The mixed classical-impulse control is then used to discuss the problem. Using inventory control theory, the value function and optimal strategy are derived.

Suggested Citation

  • Meng, Hui & Siu, Tak Kuen, 2011. "On optimal reinsurance, dividend and reinvestment strategies," Economic Modelling, Elsevier, vol. 28(1), pages 211-218.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:211-218
    DOI: 10.1016/j.econmod.2010.09.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999310001860
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2010.09.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Abel Cadenillas & Tahir Choulli & Michael Taksar & Lei Zhang, 2006. "Classical And Impulse Stochastic Control For The Optimization Of The Dividend And Risk Policies Of An Insurance Firm," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 181-202, January.
    2. Hans Gerber & Elias Shiu, 2003. "Geometric Brownian Motion Models for Assets and Liabilities: From Pension Funding to Optimal Dividends," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(3), pages 37-51.
    3. He, Lin & Liang, Zongxia, 2008. "Optimal financing and dividend control of the insurance company with proportional reinsurance policy," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 976-983, June.
    4. Suresh P. Sethi & Michael I. Taksar, 2002. "Optimal Financing of a Corporation Subject To Random Returns," Mathematical Finance, Wiley Blackwell, vol. 12(2), pages 155-172, April.
    5. T. Choulli & M. Taksar & X. Y. Zhou, 2001. "Excess-of-loss reinsurance for a company with debt liability and constraints on risk reduction," Quantitative Finance, Taylor & Francis Journals, vol. 1(6), pages 573-596.
    6. Asmussen, Soren & Taksar, Michael, 1997. "Controlled diffusion models for optimal dividend pay-out," Insurance: Mathematics and Economics, Elsevier, vol. 20(1), pages 1-15, June.
    7. Avanzi, Benjamin & U. Gerber, Hans & S.W. Shiu, Elias, 2007. "Optimal dividends in the dual model," Insurance: Mathematics and Economics, Elsevier, vol. 41(1), pages 111-123, July.
    8. Hans Gerber & Elias Shiu, 1998. "On the Time Value of Ruin," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(1), pages 48-72.
    9. Bjarne Hø Jgaard & Michael Taksar, 1999. "Controlling Risk Exposure and Dividends Payout Schemes:Insurance Company Example," Mathematical Finance, Wiley Blackwell, vol. 9(2), pages 153-182, April.
    10. Avanzi, Benjamin & Gerber, Hans U., 2008. "Optimal Dividends in the Dual Model with Diffusion," ASTIN Bulletin, Cambridge University Press, vol. 38(2), pages 653-667, November.
    11. Michael I. Taksar, 2000. "Optimal risk and dividend distribution control models for an insurance company," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 51(1), pages 1-42, February.
    12. Paulsen, Jostein & Gjessing, Hakon, 1994. "Properties of functions of the excess of loss retention limit with applications," Insurance: Mathematics and Economics, Elsevier, vol. 15(1), pages 1-21, October.
    13. Gerber, Hans U. & Smith, Nathaniel, 2008. "Optimal dividends with incomplete information in the dual model," Insurance: Mathematics and Economics, Elsevier, vol. 43(2), pages 227-233, October.
    14. Løkka, Arne & Zervos, Mihail, 2008. "Optimal dividend and issuance of equity policies in the presence of proportional costs," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 954-961, June.
    15. S. David Promislow & Virginia Young, 2005. "Minimizing the Probability of Ruin When Claims Follow Brownian Motion with Drift," North American Actuarial Journal, Taylor & Francis Journals, vol. 9(3), pages 110-128.
    16. He, Lin & Liang, Zongxia, 2009. "Optimal financing and dividend control of the insurance company with fixed and proportional transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 88-94, February.
    17. Irgens, Christian & Paulsen, Jostein, 2004. "Optimal control of risk exposure, reinsurance and investments for insurance portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 35(1), pages 21-51, August.
    18. Bjarne Højgaard & Søren Asmussen & Michael Taksar, 2000. "Optimal risk control and dividend distribution policies. Example of excess-of loss reinsurance for an insurance corporation," Finance and Stochastics, Springer, vol. 4(3), pages 299-324.
    19. Bjarne Højgaard & Michael Taksar, 2004. "Optimal dynamic portfolio selection for a corporation with controllable risk and dividend distribution policy," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 315-327.
    20. de Lourdes Centeno, Maria, 2005. "Dependent risks and excess of loss reinsurance," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 229-238, October.
    21. Sheldon Lin, X. & E. Willmot, Gordon & Drekic, Steve, 2003. "The classical risk model with a constant dividend barrier: analysis of the Gerber-Shiu discounted penalty function," Insurance: Mathematics and Economics, Elsevier, vol. 33(3), pages 551-566, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guan, Huiqi & Liang, Zongxia, 2014. "Viscosity solution and impulse control of the diffusion model with reinsurance and fixed transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 109-122.
    2. Sancho Salcedo-Sanz & Leo Carro-Calvo & Mercè Claramunt & Ana Castañer & Maite Mármol, 2014. "Effectively Tackling Reinsurance Problems by Using Evolutionary and Swarm Intelligence Algorithms," Risks, MDPI, vol. 2(2), pages 1-14, April.
    3. Choi, Sun-Yong, 2020. "Industry volatility and economic uncertainty due to the COVID-19 pandemic: Evidence from wavelet coherence analysis," Finance Research Letters, Elsevier, vol. 37(C).
    4. Liang, Zhibin & Young, Virginia R., 2012. "Dividends and reinsurance under a penalty for ruin," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 437-445.
    5. Meng, Hui & Liao, Pu & Siu, Tak Kuen, 2019. "Continuous-time optimal reinsurance strategy with nontrivial curved structures," Applied Mathematics and Computation, Elsevier, vol. 363(C), pages 1-1.
    6. Meng, Hui & Zhou, Ming & Siu, Tak Kuen, 2016. "Optimal reinsurance policies with two reinsurers in continuous time," Economic Modelling, Elsevier, vol. 59(C), pages 182-195.
    7. Khaled Masoumifard & Mohammad Zokaei, 2020. "Stochastic optimization of the Dividend strategy with reinsurance in correlated multiple insurance lines of business," Papers 2002.03295, arXiv.org.
    8. Cheng, Gongpin & Zhao, Yongxia, 2016. "Optimal risk and dividend strategies with transaction costs and terminal value," Economic Modelling, Elsevier, vol. 54(C), pages 522-536.
    9. Yao, Dingjun & Yang, Hailiang & Wang, Rongming, 2014. "Optimal risk and dividend control problem with fixed costs and salvage value: Variance premium principle," Economic Modelling, Elsevier, vol. 37(C), pages 53-64.
    10. Chen, Mi & Peng, Xiaofan & Guo, Junyi, 2013. "Optimal dividend problem with a nonlinear regular-singular stochastic control," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 448-456.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guan, Huiqi & Liang, Zongxia, 2014. "Viscosity solution and impulse control of the diffusion model with reinsurance and fixed transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 109-122.
    2. Liu, Wei & Hu, Yijun, 2014. "Optimal financing and dividend control of the insurance company with excess-of-loss reinsurance policy," Statistics & Probability Letters, Elsevier, vol. 84(C), pages 121-130.
    3. Yao, Dingjun & Yang, Hailiang & Wang, Rongming, 2011. "Optimal dividend and capital injection problem in the dual model with proportional and fixed transaction costs," European Journal of Operational Research, Elsevier, vol. 211(3), pages 568-576, June.
    4. Peng, Xiaofan & Chen, Mi & Guo, Junyi, 2012. "Optimal dividend and equity issuance problem with proportional and fixed transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 576-585.
    5. Ernst, Philip A. & Imerman, Michael B. & Shepp, Larry & Zhou, Quan, 2022. "Fiscal stimulus as an optimal control problem," Stochastic Processes and their Applications, Elsevier, vol. 150(C), pages 1091-1108.
    6. Meng, Hui & Siu, Tak Kuen & Yang, Hailiang, 2013. "Optimal dividends with debts and nonlinear insurance risk processes," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 110-121.
    7. Zhuo Jin & Zuo Quan Xu & Bin Zou, 2020. "A Perturbation Approach to Optimal Investment, Liability Ratio, and Dividend Strategies," Papers 2012.06703, arXiv.org, revised May 2021.
    8. Chen, Mi & Peng, Xiaofan & Guo, Junyi, 2013. "Optimal dividend problem with a nonlinear regular-singular stochastic control," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 448-456.
    9. Zhang, Nan & Jin, Zhuo & Li, Shuanming & Chen, Ping, 2016. "Optimal reinsurance under dynamic VaR constraint," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 232-243.
    10. Liang, Zhibin & Young, Virginia R., 2012. "Dividends and reinsurance under a penalty for ruin," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 437-445.
    11. Cheng, Gongpin & Zhao, Yongxia, 2016. "Optimal risk and dividend strategies with transaction costs and terminal value," Economic Modelling, Elsevier, vol. 54(C), pages 522-536.
    12. He, Lin & Liang, Zongxia, 2008. "Optimal financing and dividend control of the insurance company with proportional reinsurance policy," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 976-983, June.
    13. Zhou, Ming & Yuen, Kam C., 2012. "Optimal reinsurance and dividend for a diffusion model with capital injection: Variance premium principle," Economic Modelling, Elsevier, vol. 29(2), pages 198-207.
    14. Sotomayor, Luz R. & Cadenillas, Abel, 2011. "Classical and singular stochastic control for the optimal dividend policy when there is regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 48(3), pages 344-354, May.
    15. Zhu, Jinxia & Yang, Hailiang, 2016. "Optimal capital injection and dividend distribution for growth restricted diffusion models with bankruptcy," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 259-271.
    16. Yao, Dingjun & Yang, Hailiang & Wang, Rongming, 2014. "Optimal risk and dividend control problem with fixed costs and salvage value: Variance premium principle," Economic Modelling, Elsevier, vol. 37(C), pages 53-64.
    17. Xiaoqing Liang & Zbigniew Palmowski, 2016. "A note on optimal expected utility of dividend payments with proportional reinsurance," Papers 1605.06849, arXiv.org, revised May 2017.
    18. Kristoffer Lindensjö & Filip Lindskog, 2020. "Optimal dividends and capital injection under dividend restrictions," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 92(3), pages 461-487, December.
    19. He, Lin & Hou, Ping & Liang, Zongxia, 2008. "Optimal control of the insurance company with proportional reinsurance policy under solvency constraints," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 474-479, December.
    20. He, Lin & Liang, Zongxia, 2009. "Optimal financing and dividend control of the insurance company with fixed and proportional transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 88-94, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:211-218. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.