On Minimizing the Ultimate Ruin Probability of an Insurer by Reinsurance

Christian Kasumo, Juma Kasozi and Dmitry Kuznetsov

Journal of Applied Mathematics, 2018, vol. 2018, 1-11

Abstract:

We consider an insurance company whose reserves dynamics follow a diffusion-perturbed risk model. To reduce its risk, the company chooses to reinsure using proportional or excess-of-loss reinsurance. Using the Hamilton-Jacobi-Bellman (HJB) approach, we derive a second-order Volterra integrodifferential equation (VIDE) which we transform into a linear Volterra integral equation (VIE) of the second kind. We then proceed to solve this linear VIE numerically using the block-by-block method for the optimal reinsurance policy that minimizes the ultimate ruin probability for the chosen parameters. Numerical examples with both light- and heavy-tailed distributions are given. The results show that proportional reinsurance increases the survival of the company in both light- and heavy-tailed distributions for the Cramér-Lundberg and diffusion-perturbed models.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnljam:9180780

DOI: 10.1155/2018/9180780

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