Scenario Analysis for a Multi-Period Diffusion Model of Risk

Vsevolod K. Malinovskii

ASTIN Bulletin, 2009, vol. 39, issue 2, 649-676

Abstract: This paper extends and develops the results of a previous paper Malinovskii (2007). Dealing with a simplistic diffusion multi-year model of insurance operations, this paper illustrates the adaptive control approach when the object of control is the balance of solvency and equity. Compared to the previous paper, a new element is the “scenario of nature”, or the incomplete knowledge of future risk, which is quite often the case in insurance. It introduces a new and inevitable randomness in the model and leads to a qualitative difference in its behavior.

Date: 2009
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