Applying simulation optimization to the asset allocation of a property-casualty insurer

Tzu-Yi Yu, Chenghsien Tsai and Hsiao-Tzu Huang

European Journal of Operational Research, 2010, vol. 207, issue 1, 499-507

Abstract: Proper asset allocations are vital for property-casualty insurers to be competitive and solvent. Theories of finance offer little practical guidance in constructing such asset allocations however. This research integrates simulation models with a newly developed evolutionary algorithm for the multi-period asset allocation problem of a property-casualty insurer. We first construct a simulation model to simulate operations of a property-casualty insurer. Then we develop multi-phase evolution strategies (MPES) to be used with the simulation model to search for promising asset allocations for the insurer. A thorough experiment is conducted to evaluate the performance of our simulation optimization approach. Computational results show that MPES is an effective search algorithm. It dominates the grid search method by a significant margin. The re-allocation strategy resulting from MPES outperforms re-balancing strategies significantly. This research further demonstrates that the simulation optimization approach can be used to study economic issues related to multi-period asset allocation problems in practical settings.

Keywords: Simulation; Optimization; Evolution; strategies; Asset; allocation; Property-casualty; insurance (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:207:y:2010:i:1:p:499-507

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