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Optimal Portfolios of an Insurer and a Reinsurer under Proportional Reinsurance and Power Utility Preference

DOI: 10.4236/oalib.1102033    572 Downloads   904 Views   Citations

ABSTRACT

This study tackled portfolio selection problem for an insurer as well as a reinsurer aiming at maximizing the probability of survival of the Insurer and the Reinsurer, to assess the impact of proportional reinsurance on the survival of insurance companies as well as to determine the condition that would warrant reinsurance according to the optimal reinsurance proportion chosen by the insurer. It was assumed the insurer’s and the reinsurer’s surplus processes were approximated by Brownian motion with drift and the insurer could purchase proportional reinsurance from the reinsurer and their risk reserves followed Brownian motion with drift. Obtained were Hamilton-Jacobi-Bellman (HJB) equations which solutions gave the optimized values of the insurer’s and the reinsurer’s optimal investments in the risky asset and the value of the discount rate that would warrant reinsurance as a ratio of their portfolio weights in the risky asset.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

Ihedioha, S. and Osu, B. (2015) Optimal Portfolios of an Insurer and a Reinsurer under Proportional Reinsurance and Power Utility Preference. Open Access Library Journal, 2, 1-11. doi: 10.4236/oalib.1102033.

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