Insurer Optimal Asset Allocation in a Small and Closed Economy: The Case of Iran’s Social Security Organization

Elaheh Esfandi (), Mir Hossein Mousavi (), Rassam Moshrefi () and Babak Farhang-Moghaddam
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Elaheh Esfandi: Department of Economics, Alzahra University
Mir Hossein Mousavi: Department of Economics, Alzahra University
Rassam Moshrefi: Department of Economics, Faculty of Economics and Political Science, Shahid Beheshti University
Babak Farhang-Moghaddam: Economics and Systems Department, Institute for Management and Planning Studies

Journal of Money and Economy, 2020, vol. 15, issue 4, 445-461

Abstract: We seek to determine the optimal amount of the insurer’s investment in all types of assets for a small and closed economy. The goal is to detect the implications and contributions the risk seeker and risk aversion insurer commonly make and the effectiveness in the investment decision. Also, finding the optimum portfolio for each is the main goal of the present study. To this end, we adopted the optimal asset-liability management (ALM) method to control the firm's risk of financial stability and growth by balancing the assets and liabilities of the firm. In the process, stochastic interest rates and inflation risks were taken into account according to the expected utility maximization framework. All assets were established and calculated by the Kalman Filter with the stochastic interest rate following the Hull-White model; an additional stochastic process models the inflation risk. To consider the stochastic process, we employed the geometric Brownian motion in the liability process to ensure a definite liability value. We chose Iran’s Social Security Organization as our sample insurer company since it has a portfolio of five types of assets and four types of liabilities, and operates in a small and closed economy. By Applying the ALM method with the stochastic control theory approach, we acquire the optimal investment strategies for insurers to minimize their risk. Our findings demonstrate the effects of model parameters, such as the degree of risk-taking on the insurer decision.

Keywords: ALM; Portfolio; Optimization; Insurer; Decision-Making; Financial Market (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Date: 2020
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