Optimal Surplus Management for Insurers under Stochastic Interest Rates and Jump-Driven Liabilities

Nader Karimi, Foad Shokrollahi and Masoumeh Shahmoradi

Papers from arXiv.org

Abstract: This paper investigates the optimal surplus management problem of an insurance company operating in a financial market with stochastic interest rates and jump-driven liabilities. The insurer dynamically allocates its surplus between a risky stock and a risk-free zero-coupon bond while facing insurance claims modeled by a compound Poisson process with exponentially distributed claim sizes. The short term interest rate follows a Cox-Ingersoll-Ross (CIR) process, which captures mean-reverting dynamics commonly observed in term structure models. The insurer maximizes the expected exponential utility of terminal surplus. Using stochastic control techniques, we derive the associated Hamilton-Jacobi-Bellman (HJB) equation. Although the exponential utility structure suggests an exponential affine representation, the interaction between the interest rate hedge and the surplus state generates quadratic surplus terms in the HJB equation. To obtain a tractable formulation, we adopt a normalized surplus projection method, which provides an approximate reduction of the full three-dimensional problem to a nonlinear system of partial differential equations (which is subsequently numerically validated). The optimal investment policy admits an economically meaningful decomposition consisting of a myopic demand component and an interest rate hedging component. Numerical experiments illustrate how the optimal strategy and the surplus distribution depend on interest rate volatility, claim intensity, and risk aversion. The results highlight the importance of jointly modeling stochastic interest rates and insurance liability risk when designing optimal investment policies for insurance companies.

Date: 2026-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2607.21687 Latest version (application/pdf)

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:arx:papers:2607.21687

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().