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Analysis of risk models using a level crossing technique

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  • Brill, Percy H.
  • Yu, Kaiqi

Abstract

This paper analyzes ruin-like risk models in Insurance, which are variants of the Cramer–Lundberg (C–L) model with a barrier or a threshold. We consider three model variants, which have different portfolio strategies when the risk reserve reaches the barrier or exceeds the threshold. In these models we construct a time-extended risk process defined on cycles of a specific renewal process. The time until ruin is equal to one cycle of the specific renewal process. We also consider a fourth model, which is a variant of a model proposed by Dickson and Waters (2004). The analysis of each model employs a level crossing method (LC) to derive the steady-state probability distribution of the time-extended risk process. From the derived distribution we compute the expected time until ruin, the probability distribution of the deficit at ruin, and related quantities of interest.

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  • Brill, Percy H. & Yu, Kaiqi, 2011. "Analysis of risk models using a level crossing technique," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 298-309.
    • Handle: RePEc:eee:insuma:v:49:y:2011:i:3:p:298-309
    DOI: 10.1016/j.insmatheco.2011.05.005
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    References listed on IDEAS

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    1. Percy H. Brill, 2008. "Level Crossing Methods in Stochastic Models," International Series in Operations Research and Management Science, Springer, number 978-0-387-09421-2, April.
    2. Lin, X.Sheldon & Pavlova, Kristina P., 2006. "The compound Poisson risk model with a threshold dividend strategy," Insurance: Mathematics and Economics, Elsevier, vol. 38(1), pages 57-80, February.
    3. Benjamin Avanzi, 2009. "Strategies for Dividend Distribution: A Review," North American Actuarial Journal, Taylor & Francis Journals, vol. 13(2), pages 217-251.
    4. Frostig, Esther, 2005. "The expected time to ruin in a risk process with constant barrier via martingales," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 216-228, October.
    5. Lin, X. Sheldon & Sendova, Kristina P., 2008. "The compound Poisson risk model with multiple thresholds," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 617-627, April.
    6. Dickson, David C.M. & Waters, Howard R., 2004. "Some Optimal Dividends Problems," ASTIN Bulletin, Cambridge University Press, vol. 34(1), pages 49-74, May.
    7. P. H. Brill & M. J. M. Posner, 1977. "Level Crossings in Point Processes Applied to Queues: Single-Server Case," Operations Research, INFORMS, vol. 25(4), pages 662-674, August.
    8. Dickson,David C. M., 2005. "Insurance Risk and Ruin," Cambridge Books, Cambridge University Press, number 9780521846400.
    9. Shuanming Li & Yi Lu, 2007. "Moments of the Dividend Payments and Related Problems in a Markov-Modulated Risk Model," North American Actuarial Journal, Taylor & Francis Journals, vol. 11(2), pages 65-76.
    10. Lu, Yi & Li, Shuanming, 2009. "The Markovian regime-switching risk model with a threshold dividend strategy," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 296-303, April.
    11. Hans Gerber & Elias Shiu, 1998. "On the Time Value of Ruin," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(1), pages 48-72.
    12. P. H. Brill & M. J. M. Posner, 1981. "The System Point Method in Exponential Queues: A Level Crossing Approach," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 31-49, February.
    13. Percy H. Brill & Ben A. Chaouch, 1995. "An EOQ Model with Random Variations in Demand," Management Science, INFORMS, vol. 41(5), pages 927-936, May.
    14. Gerber, Hans U. & Shiu, Elias S. W., 1997. "The joint distribution of the time of ruin, the surplus immediately before ruin, and the deficit at ruin," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 129-137, November.
    15. 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.
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    Cited by:

    1. Brill, Percy H., 2015. "Note on the service time in an M/G/1 queue with bounded workload," Statistics & Probability Letters, Elsevier, vol. 96(C), pages 162-169.
    2. Ben A. Chaouch, 2018. "Analysis of the stochastic cash balance problem using a level crossing technique," Annals of Operations Research, Springer, vol. 271(2), pages 429-444, December.

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    More about this item

    Keywords

    Dividend barrier or threshold; Time until ruin; Deficit at ruin; Heavy-tailed claim sizes; Hyperexponential claim sizes; Level crossing method;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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