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Optimal decision on dynamic insurance price and investment portfolio of an insurer

Author

Listed:
  • Mao, Hong
  • Carson, James M.
  • Ostaszewski, Krzysztof M.
  • Wen, Zhongkai

Abstract

We establish a model of insurance pricing with the assumption that the insurance price, insurer investment returns, and insured losses are correlated stochastic processes. We consider the effect of demand on price where the objective of the pricing model is to maximize the expected utility of the insurer’s terminal wealth. Based on a Hamilton–Jacobi–Bellman (HJB) equation, we simultaneously solve for the optimal price of an insurance contract and the optimal investment portfolio of an insurer. The results show that quantity demanded of insurance contracts affects the optimal allocation to risky assets in the insurer’s investment portfolio. Our results also show that the drift and volatility of the insurance price process will affect the investment strategy, in addition to the effect of the drift and volatility of the investment process itself.

Suggested Citation

  • Mao, Hong & Carson, James M. & Ostaszewski, Krzysztof M. & Wen, Zhongkai, 2013. "Optimal decision on dynamic insurance price and investment portfolio of an insurer," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 359-369.
    • Handle: RePEc:eee:insuma:v:52:y:2013:i:2:p:359-369
    DOI: 10.1016/j.insmatheco.2013.01.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Stochastic optimal control; Insurance pricing; Demand; Investment portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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