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Optimal debt ratio and dividend payment strategies with reinsurance

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  • Jin, Zhuo
  • Yang, Hailiang
  • Yin, G.

Abstract

This paper derives the optimal debt ratio and dividend payment strategies for an insurance company. Taking into account the impact of reinsurance policies and claims from the credit derivatives, the surplus process is stochastic that is jointly determined by the reinsurance strategies, debt levels, and unanticipated shocks. The objective is to maximize the total expected discounted utility of dividend payment until financial ruin. Using dynamic programming principle, the value function is the solution of a second-order nonlinear Hamilton–Jacobi–Bellman equation. The subsolution–supersolution method is used to verify the existence of classical solutions of the Hamilton–Jacobi–Bellman equation. The explicit solution of the value function is derived and the corresponding optimal debt ratio and dividend payment strategies are obtained in some special cases. An example is provided to illustrate the methodologies and some interesting economic insights.

Suggested Citation

  • Jin, Zhuo & Yang, Hailiang & Yin, G., 2015. "Optimal debt ratio and dividend payment strategies with reinsurance," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 351-363.
    • Handle: RePEc:eee:insuma:v:64:y:2015:i:c:p:351-363
    DOI: 10.1016/j.insmatheco.2015.07.005
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    References listed on IDEAS

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    1. Jin, Zhuo & Yin, G. & Wu, Fuke, 2013. "Optimal reinsurance strategies in regime-switching jump diffusion models: Stochastic differential game formulation and numerical methods," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 733-746.
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    8. 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.
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    Cited by:

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    2. Dan Zhu & Cuixia Chen & Bing Liu, 2023. "Optimal Debt Ratio and Dividend Payment Policies for Insurers with Ambiguity," Mathematics, MDPI, vol. 12(1), pages 1-12, December.
    3. 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.

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