Moments of Discounted Dividends for a Threshold Strategy in the Compound Poisson Risk Model

Eric Cheung, David Dickson and Steve Drekic

North American Actuarial Journal, 2008, vol. 12, issue 3, 299-318

Abstract: We consider a compound Poisson risk model in which part of the premium is paid to the shareholders as dividends when the surplus exceeds a specified threshold level. In this model we are interested in computing the moments of the total discounted dividends paid until ruin occurs. However, instead of employing the traditional argument, which involves conditioning on the time and amount of the first claim, we provide an alternative probabilistic approach that makes use of the (defective) joint probability density function of the time of ruin and the deficit at ruin in a classical model without a threshold. We arrive at a general formula that allows us to evaluate the moments of the total discounted dividends recursively in terms of the lower-order moments. Assuming the claim size distribution is exponential or, more generally, a finite shape and scale mixture of Erlangs, we are able to solve for all necessary components in the general recursive formula. In addition to determining the optimal threshold level to maximize the expected value of discounted dividends, we also consider finding the optimal threshold level that minimizes the coefficient of variation of discounted dividends. We present several numerical examples that illustrate the effects of the choice of optimality criterion on quantities such as the ruin probability.

Date: 2008
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DOI: 10.1080/10920277.2008.10597523

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