Optimal reinsurance and investment strategies for insurer under interest rate and inflation risks

Guohui Guan and Zongxia Liang

Insurance: Mathematics and Economics, 2014, vol. 55, issue C, 105-115

Abstract: In this paper, we investigate an optimal reinsurance and investment problem for an insurer whose surplus process is approximated by a drifted Brownian motion. Proportional reinsurance is to hedge the risk of insurance. Interest rate risk and inflation risk are considered. We suppose that the instantaneous nominal interest rate follows an Ornstein–Uhlenbeck process, and the inflation index is given by a generalized Fisher equation. To make the market complete, zero-coupon bonds and Treasury Inflation Protected Securities (TIPS) are included in the market. The financial market consists of cash, zero-coupon bond, TIPS and stock. We employ the stochastic dynamic programming to derive the closed-forms of the optimal reinsurance and investment strategies as well as the optimal utility function under the constant relative risk aversion (CRRA) utility maximization. Sensitivity analysis is given to show the economic behavior of the optimal strategies and optimal utility.

Keywords: IE13; IE12; IM52; IB91; IE53; IE43; Optimal proportional reinsurance strategy; Optimal investment strategy; CRRA utility; Stochastic dynamic programming; Stochastic inflation index; Stochastic interest rate (search for similar items in EconPapers)
JEL-codes: C61 G11 G32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:55:y:2014:i:c:p:105-115

DOI: 10.1016/j.insmatheco.2014.01.007

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