Excess-of-loss reinsurance for a company with debt liability and constraints on risk reduction

T. Choulli, M. Taksar and X. Y. Zhou

Quantitative Finance, 2001, vol. 1, issue 6, 573-596

Abstract: We consider a problem of risk control and dividend optimization for a financial corporation facing a constant liability payment. More specifically we investigate the case of excess-of-loss reinsurance for an insurance company. In this scheme the insurance company diverts a part of its premium stream to another company, the reinsurer, in exchange for an obligation to pick up that amount of each claim which exceeds a certain level a. The objective of the insurer is to maximize the expected present value of total future dividend pay-outs. We consider cases when there is restriction on the rate of dividend pay-outs and when there is no restriction. In both cases we describe explicitly the optimal return function as well as the optimal policy.

Date: 2001
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DOI: 10.1088/1469-7688/1/6/301

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