On the surplus management of funds with assets and liabilities in presence of solvency requirements

Benjamin Avanzi, Ping Chen, Lars Frederik Brandt Henriksen and Bernard Wong

Scandinavian Actuarial Journal, 2023, vol. 2023, issue 5, 477-508

Abstract: In this paper, we consider a company whose assets and liabilities evolve according to a correlated bivariate geometric Brownian motion, such as in Gerber and Shiu [(2003). Geometric Brownian motion models for assets and liabilities: From pension funding to optimal dividends. North American Actuarial Journal 7(3), 37–56]. We determine what dividend strategy maximises the expected present value of dividends until ruin in two cases: (i) when shareholders won't cover surplus shortfalls and a solvency constraint [as in Paulsen (2003). Optimal dividend payouts for diffusions with solvency constraints. Finance and Stochastics 7(4), 457–473] is consequently imposed and (ii) when shareholders are always to fund any capital deficiency with capital (asset) injections. In the latter case, ruin will never occur and the objective is to maximise the difference between dividends and capital injections. Developing and using appropriate verification lemmas, we show that the optimal dividend strategy is, in both cases, of barrier type. Both value functions are derived in closed form. Furthermore, the barrier is defined on the ratio of assets to liabilities, which mimics some of the dividend strategies that can be observed in practice by insurance companies. The existence and uniqueness of the optimal strategies are shown. Results are illustrated.

Date: 2023
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DOI: 10.1080/03461238.2022.2116725

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