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Optimal financing and dividend control of the insurance company with excess-of-loss reinsurance policy

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  • Liu, Wei
  • Hu, Yijun

Abstract

In this paper, we consider an optimal financing and dividend control problem of an insurance company. The management of the insurance company controls the dividends payout, equity issuance and the excess-of-loss reinsurance policy. In our model, the dividends are assumed to be paid out continuously, which is of interest from the perspective of financial modeling. The objective is to find the strategy which maximizes the expected present values of the dividends payout minus the equity issuance up to the time of ruin. We solve the optimal control problem and identify the optimal strategy by constructing two categories of suboptimal control problems.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:stapro:v:84:y:2014:i:c:p:121-130
    DOI: 10.1016/j.spl.2013.09.034
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    References listed on IDEAS

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    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. 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.
    3. Bjarne Højgaard & Michael Taksar, 2001. "Optimal risk control for a large corporation in the presence of returns on investments," Finance and Stochastics, Springer, vol. 5(4), pages 527-547.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
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    Cited by:

    1. Li, Peng & Zhou, Ming & Yao, Dingjun, 2022. "Optimal time for the excess of loss reinsurance with fixed costs," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 466-475.
    2. Bashir Zahid & Rafique Zulqurnain Zeeshan & Toor Kashif Naseer, 2022. "How do dynamic financing decisions explain the behavior of dividend payout policies?: An Empirical Study of Listed Pakistani Manufacturing Firms," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 18(1), pages 1-15, March.

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