Derivatives trading for insurers

Xiaole Xue, Pengyu Wei and Chengguo Weng

Insurance: Mathematics and Economics, 2019, vol. 84, issue C, 40-53

Abstract: We investigate optimal strategies for a constant absolute risk aversion (CARA) insurer to manage its business risk through not only equity investment and proportional reinsurance but also trading derivatives of the equity. We obtain the optimal strategies in closed-form and quantify the value of derivatives trading by means of certainty-equivalence. Some numerical examples and sensitivity analysis are presented to illustrate our theoretical results. Our numerical results show that, unlike standard CRRA investors, the gain from trading derivatives to a CARA insurer is small and the insurer needs to expose itself to a relatively large position to fully enjoy the gain.

Keywords: Derivatives trading; HJB equations; Investment–reinsurance; Stochastic control; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C61 G11 G22 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:84:y:2019:i:c:p:40-53

DOI: 10.1016/j.insmatheco.2018.11.001

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