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Minimizing the ruin probability allowing investments in two assets: a two-dimensional problem

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  • Pablo Azcue
  • Nora Muler

Abstract

We consider in this paper that the reserve of an insurance company follows the classical model, in which the aggregate claim amount follows a compound Poisson process. Our goal is to minimize the ruin probability of the company assuming that the management can invest dynamically part of the reserve in an asset that has a positive fixed return. However, due to transaction costs, the sale price of the asset at the time when the company needs cash to cover claims is lower than the original price. This is a singular two-dimensional stochastic control problem which cannot be reduced to a one-dimensional problem. The associated Hamilton–Jacobi–Bellman (HJB) equation is a variational inequality involving a first order integro-differential operator and a gradient constraint. We characterize the optimal value function as the unique viscosity solution of the associated HJB equation. For exponential claim distributions, we show that the optimal value function is induced by a two-region stationary strategy (“action” and “inaction” regions) and we find an implicit formula for the free boundary between these two regions. We also study the optimal strategy for small and large initial capital and show some numerical examples. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Pablo Azcue & Nora Muler, 2013. "Minimizing the ruin probability allowing investments in two assets: a two-dimensional problem," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 77(2), pages 177-206, April.
    • Handle: RePEc:spr:mathme:v:77:y:2013:i:2:p:177-206
    DOI: 10.1007/s00186-012-0424-3
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    References listed on IDEAS

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    1. Rob Kaas & Marc Goovaerts & Jan Dhaene & Michel Denuit, 2008. "Modern Actuarial Risk Theory," Springer Books, Springer, edition 2, number 978-3-540-70998-5, December.
    2. Pablo Azcue & Nora Muler, 2005. "Optimal Reinsurance And Dividend Distribution Policies In The Cramér‐Lundberg Model," Mathematical Finance, Wiley Blackwell, vol. 15(2), pages 261-308, April.
    3. Hipp, Christian & Plum, Michael, 2000. "Optimal investment for insurers," Insurance: Mathematics and Economics, Elsevier, vol. 27(2), pages 215-228, October.
    4. Azcue, Pablo & Muler, Nora, 2009. "Optimal investment strategy to minimize the ruin probability of an insurance company under borrowing constraints," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 26-34, February.
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    Cited by:

    1. Zeng, Yan & Li, Danping & Gu, Ailing, 2016. "Robust equilibrium reinsurance-investment strategy for a mean–variance insurer in a model with jumps," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 138-152.
    2. Pablo Azcue & Nora Muler & Zbigniew Palmowski, 2016. "Optimal dividend payments for a two-dimensional insurance risk process," Papers 1603.07019, arXiv.org, revised Apr 2018.
    3. Deng, Chao & Zeng, Xudong & Zhu, Huiming, 2018. "Non-zero-sum stochastic differential reinsurance and investment games with default risk," European Journal of Operational Research, Elsevier, vol. 264(3), pages 1144-1158.
    4. Shen, Yang & Zeng, Yan, 2015. "Optimal investment–reinsurance strategy for mean–variance insurers with square-root factor process," Insurance: Mathematics and Economics, Elsevier, vol. 62(C), pages 118-137.
    5. Linlin Tian & Lihua Bai, 2020. "Minimizing the Ruin Probability under the Sparre Andersen Model," Papers 2004.08124, arXiv.org.
    6. Hansjoerg Albrecher & Pablo Azcue & Nora Muler, 2015. "Optimal Dividend Strategies for Two Collaborating Insurance Companies," Papers 1505.03980, arXiv.org.

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