Optimal reinsurance with a systemic surplus shock

Kwangmin Jung and Seyoung Park

Economics Letters, 2024, vol. 244, issue C

Abstract: We examine the optimal reinsurance and asset allocation strategies for an insurer who minimizes the ruin probability and faces a systemic surplus shock. Analytically tractable solutions are obtained when this shock occurs at an uncertain time. We then demonstrate that the systemic surplus shock results in a nonstandard form of market incompleteness, which alters both qualitative and quantitative features of existing strategies without the surplus shock. In particular, a specific form of the marginal value for the insurer’s minimized ruin probability plays a key role in the characterization of optimal policies with the systemic surplus shock.

Keywords: Reinsurance; Asset allocation; Systemic risk; Ruin probability (search for similar items in EconPapers)
JEL-codes: G11 G22 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:244:y:2024:i:c:s016517652400497x

DOI: 10.1016/j.econlet.2024.112013

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