Hedging, Cash Flows, and Firm Value: Evidence of an Indirect Effect

Hong Mao, James M. Carson and Krzysztof M. Ostaszewski

Journal of Insurance Issues, 2017, vol. 40, issue 1, 90-124

Abstract: We extend previous research by considering the role of reinsurance in hedging underwriting risk, pricing risk, and investment risk. We consider a stochastic dynamic optimization model applied to the problem of insurance pricing under a competitive insurance market with a jump diffusion risk process. Our model seeks to maximize the expected utility of the insurer’s terminal wealth, incorporating the interaction of a stochastic process for the insurance price evolution, reinsurance, investment strategy, and the possible hedging effect between insurance liabilities and investment risk. We solve this optimization problem by constructing a Hamilton– Jacobi–Bellman (HJB) equation.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wri:journl:v:40:y:2017:i:1:p:90-124

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