Economy – Quantitative Finance – Risk Management
Scientific paper
2010-05-09
Economy
Quantitative Finance
Risk Management
30 pages, 6 figures
Scientific paper
Based on a point of view that solvency and security are first, this paper considers regular-singular stochastic optimal control problem of a large insurance company facing positive transaction cost asked by reinsurer under solvency constraint. The company controls proportional reinsurance and dividend pay-out policy to maximize the expected present value of the dividend pay-outs until the time of bankruptcy. The paper aims at deriving the optimal retention ratio, dividend payout level, explicit value function of the insurance company via stochastic analysis and PDE methods. The results present the best equilibrium point between maximization of dividend pay-outs and minimization of risks. The paper also gets a risk-based capital standard to ensure the capital requirement of can cover the total given risk. We present numerical results to make analysis how the model parameters, such as, volatility, premium rate, and risk level, impact on risk-based capital standard, optimal retention ratio, optimal dividend payout level and the company's profit.
Liang Zongxia
Yao Jicheng
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