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Optimal Surplus-dependent Reinsurance under Regime-Switching in a Brownian Risk Model

Author

Listed:
  • Eisenberg, Julia

    (Center for Mathematical Economics, Bielefeld University)

  • Fabrykowski, Lukas

    (Center for Mathematical Economics, Bielefeld University)

  • Schmeck, Maren Diane

    (Center for Mathematical Economics, Bielefeld University)

Abstract

In this paper, we consider a company that wishes to determine the optimal reinsurance strategy minimising the total expected discounted amount of capital injections needed to prevent the ruin. The company's surplus process is assumed to follow a Brownian motion with drift, and the reinsurance price is modelled by a continuous-time Markov chain with two states. The presence of regime-switching complicates substantially the optimal reinsurance problem, as the surplus-independent strategies turn out to be suboptimal. We develop a recursive approach that allows to represent a solution to the corresponding Hamilton-Jacobi-Bellman equation and the corresponding reinsurance strategy as the unique limits of the sequence of solutions to ordinary differential equations and their first and second order derivatives. Via Ito's formula we prove the constructed function to be the value function. Two examples illustrate the recursive procedure along with a numerical approach yielding the direct solution to the HJB equation.

Suggested Citation

  • Eisenberg, Julia & Fabrykowski, Lukas & Schmeck, Maren Diane, 2021. "Optimal Surplus-dependent Reinsurance under Regime-Switching in a Brownian Risk Model," Center for Mathematical Economics Working Papers 648, Center for Mathematical Economics, Bielefeld University.
    • Handle: RePEc:bie:wpaper:648
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    File URL: https://pub.uni-bielefeld.de/download/2953603/2953606
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    References listed on IDEAS

    as
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    Cited by:

    1. Abbaspour, Manijeh & Vajargah, Kianoush Fathi & Azhdari, Parvin, 2023. "An efficient algorithm for pricing reinsurance contract under the regime-switching model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 211(C), pages 278-300.
    2. Corina Constantinescu & Julia Eisenberg, 2021. "Special Issue “Interplay between Financial and Actuarial Mathematics”," Risks, MDPI, vol. 9(8), pages 1-3, July.
    3. Federico, Salvatore & Ferrari, Giorgio & Torrente, Maria Laura, 2023. "Irreversible Reinsurance: Minimization of Capital Injections in Presence of a Fixed Cost," Center for Mathematical Economics Working Papers 682, Center for Mathematical Economics, Bielefeld University.

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