Optimal dividend strategy for an insurance group with contagious default risk

Zhuo Jin, Huafu Liao, Yue Yang and Xiang Yu

Scandinavian Actuarial Journal, 2021, vol. 2021, issue 4, 335-361

Abstract: This paper studies the optimal dividend for a multi-line insurance group, in which each subsidiary runs a product line and is exposed to some external credit risk. The default contagion is considered such that one default event may increase the default probabilities of all surviving subsidiaries. The total dividend problem for the insurance group is investigated and we find that the optimal dividend strategy is still of the barrier type. Furthermore, we show that the optimal barrier of each subsidiary is modulated by the default state. That is, how many and which subsidiaries have defaulted will determine the dividend threshold of each surviving subsidiary. These conclusions are based on the analysis of the associated recursive system of Hamilton–Jacobi–Bellman variational inequalities (HJBVIs). The existence of the classical solution is established and the verification theorem is proved. In the case of two subsidiaries, the value function and optimal barriers are given in analytical forms, allowing us to conclude that the optimal barrier of one subsidiary decreases if the other subsidiary defaults.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1080/03461238.2020.1845231 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:sactxx:v:2021:y:2021:i:4:p:335-361

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/sact20

DOI: 10.1080/03461238.2020.1845231

Access Statistics for this article

Scandinavian Actuarial Journal is currently edited by Boualem Djehiche

More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().