Optimal reinsurance to minimize the probability of drawdown under the mean-variance premium principle

Xia Han, Zhibin Liang and Virginia R. Young

Scandinavian Actuarial Journal, 2020, vol. 2020, issue 10, 879-903

Abstract: In this paper, we determine the optimal reinsurance strategy to minimize the probability of drawdown, namely, the probability that the insurer's surplus process reaches some fixed fraction of its maximum value to date. We assume that the reinsurance premium is computed according to the mean-variance premium principle, a combination of the expected-value and variance premium principles. We derive closed-form expressions of the optimal reinsurance strategy and the corresponding minimum probability of drawdown. Then, under the variance premium principle, we show that the safe level can never be reached before drawdown under the optimally controlled surplus process. Finally, we present some numerical examples to show the impact of model parameters on the optimal results.

Date: 2020
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DOI: 10.1080/03461238.2020.1788136

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