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Applying simulation optimization to the asset allocation of a property-casualty insurer

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  • Yu, Tzu-Yi
  • Tsai, Chenghsien
  • Huang, Hsiao-Tzu

Abstract

Proper asset allocations are vital for property-casualty insurers to be competitive and solvent. Theories of finance offer little practical guidance in constructing such asset allocations however. This research integrates simulation models with a newly developed evolutionary algorithm for the multi-period asset allocation problem of a property-casualty insurer. We first construct a simulation model to simulate operations of a property-casualty insurer. Then we develop multi-phase evolution strategies (MPES) to be used with the simulation model to search for promising asset allocations for the insurer. A thorough experiment is conducted to evaluate the performance of our simulation optimization approach. Computational results show that MPES is an effective search algorithm. It dominates the grid search method by a significant margin. The re-allocation strategy resulting from MPES outperforms re-balancing strategies significantly. This research further demonstrates that the simulation optimization approach can be used to study economic issues related to multi-period asset allocation problems in practical settings.

Suggested Citation

  • Yu, Tzu-Yi & Tsai, Chenghsien & Huang, Hsiao-Tzu, 2010. "Applying simulation optimization to the asset allocation of a property-casualty insurer," European Journal of Operational Research, Elsevier, vol. 207(1), pages 499-507, November.
    • Handle: RePEc:eee:ejores:v:207:y:2010:i:1:p:499-507
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    References listed on IDEAS

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    Cited by:

    1. Eckert, Johanna & Gatzert, Nadine, 2018. "Risk- and value-based management for non-life insurers under solvency constraints," European Journal of Operational Research, Elsevier, vol. 266(2), pages 761-774.
    2. Bilel Jarraya & Abdelfettah Bouri, 2013. "A Theoretical Assessment on Optimal Asset Allocations in Insurance Industry," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 2(4), pages 30-44, October.
    3. Bilel JARRAYA, 2013. "Asset Allocation And Portfolio Optimization Problems With Metaheuristics: A Literature Survey," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 3(4), pages 38-56, December.
    4. Tsai, Shing Chih & Fu, Sheng Yang, 2014. "Genetic-algorithm-based simulation optimization considering a single stochastic constraint," European Journal of Operational Research, Elsevier, vol. 236(1), pages 113-125.
    5. Jarraya, Bilel & Bouri, Abdelfettah, 2013. "Multiobjective optimization for the asset allocation of European nonlife insurance companies," MPRA Paper 53697, University Library of Munich, Germany, revised 2013.
    6. Runsheng Gu & Lioudmila Vostrikova & Bruno Séjourné, 2020. "Portfolio optimization of euro-denominated funds in French life insurance," Working Papers hal-03025191, HAL.

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