2,608 research outputs found
On the Optimal Dividend Problem for Insurance Risk Models with Surplus-Dependent Premiums
This paper concerns an optimal dividend distribution problem for an insurance
company with surplus-dependent premium. In the absence of dividend payments,
such a risk process is a particular case of so-called piecewise deterministic
Markov processes. The control mechanism chooses the size of dividend payments.
The objective consists in maximazing the sum of the expected cumulative
discounted dividend payments received until the time of ruin and a penalty
payment at the time of ruin, which is an increasing function of the size of the
shortfall at ruin. A complete solution is presented to the corresponding
stochastic control problem. We identify the associated Hamilton-Jacobi-Bellman
equation and find necessary and sufficient conditions for optimality of a
single dividend-band strategy, in terms of particular Gerber-Shiu functions. A
number of concrete examples are analyzed
On the Bail-Out Optimal Dividend Problem
This paper studies the optimal dividend problem with capital injection under
the constraint that the cumulative dividend strategy is absolutely continuous.
We consider an open problem of the general spectrally negative case and derive
the optimal solution explicitly using the fluctuation identities of the
refracted-reflected L\'evy process. The optimal strategy as well as the value
function are concisely written in terms of the scale function. Numerical
results are also provided to confirm the analytical conclusions.Comment: To appear in Journal of Optimization Theory and Applications.
Keywords: stochastic control, scale functions, refracted-reflected L\'evy
processes, bail-out dividend proble
On Fair Reinsurance Premiums; Capital Injections in a Perturbed Risk Model
We consider a risk model where deficits after ruin are covered by a new type
of reinsurance contract that provides capital injections. To allow the
insurance company's survival after ruin, the reinsurer injects capital only at
ruin times caused by jumps larger than a chosen retention level. Otherwise
capital must be raised from the shareholders for small deficits. The problem
here is to determine adequate reinsurance premiums. It seems fair to base the
net reinsurance premium on the discounted expected value of any future capital
injections. Inspired by the results of Huzak et al. (2004) and Ben Salah (2014)
on successive ruin events, we show that an explicit formula for these
reinsurance premiums exists in a setting where aggregate claims are modeled by
a subordinator and a Brownian perturbation. Here ruin events are due either to
Brownian oscillations or jumps and reinsurance capital injections only apply in
the latter case. The results are illustrated explicitly for two specific risk
models and in some numerical examples.Comment: 23 pages, 3 figure
Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry
The use of derivatives in corporate risk management has grown rapidly in recent years. In this paper, the authors explore the factors that influence the use of financial derivatives in the U.S. insurance industry. Their objective is to investigate the motivations for corporate risk management The authors use regulatory data on individual holdings and transactions in derivative markets. According to modern finance theory, shares of widely held corporations are held by diversified investors who operate in frictionless and complete markets and eliminate non-systematic risk through their portfolio choices. But this theory has been challenged by new hypotheses that take into account market imperfections, information asymmetries and incentive conflicts as motivations for corporate managers to change the risk/return profile of their firm. The authors develop a set of hypotheses regarding the hedging behavior of insurers and perform tests on a sample of life and property-liability insurers to test them. The sample consists of all U.S. life and property-liability insurers reporting to the NAIC. The authors investigate the decision to conduct derivatives transactions and the volume of transactions undertaken. There are two primary theories about the motivations for corporate risk management - maximization of shareholder value and maximization of managerial utility. The authors discuss these theories, the hypotheses they develop from them , and specify variables to test their hypotheses. They posit the following rationales for why corporations may choose to engage in risk management and also specify variables that help them study the use of these rationales by insurance firms: to avoid the costs of financial distress; to hedge part of their investment default/volatility/liquidity risks; to avoid shocks to equity that result in high leverage ratios; to minimize taxes and enhance firm value by reducing the volatility of earnings; to maximize managerial utility. The authors argue that the use of derivatives for speculative purposes in the insurance industry is not common. The authors analyze the decision by insurers to enter the market and their volume of transactions. They use probit analysis to study the participation decision and Tobit analysis along with Cragg's generalization of the Tobit analysis to study volume. The results provide support for the authors' hypothesis that insurers hedge to maximize shareholder value. The analysis provides only weak support for the managerial utility hypothesis. Insurers are motivated to use financial derivatives to reduce the expected costs of financial distress. There is also evidence that insurers use derivatives to hedge asset volatility and exchange rate risks. There is also evidence that there are significant economies of scale in running derivatives operations - only large firms and/or those with higher than average risk exposure find it worthwhile to pay the fixed cost of setting up a derivatives operation. Overall, insurers with higher than average asset risk exposures use derivative securities.
Dynamic Models of the Insurance Markets
This is a multi-essay dissertation in the area of dynamic models of the insurance markets. I study issues in insurance markets by examining individual behavior and industry performance in dynamic settings. My first essay studies household life insurance demand and saving decisions by applying a heterogeneous-agent life cycle model with wage shocks and mortality shocks. This essay proposes the most important determinants of household life insurance demand, and shows the joint decision of life insurance purchase between couples. My second essay focuses on the property-liability insurance market, and aims to study the impact of one catastrophe event on an insurer’s underwritings and capital raising strategy. The two-period cash flow model is built to also explore what kind of insurers can benefit from catastrophic risk underwritings. My third essay extends the second essay by incorporating a dynamic cash flow model with a series of loss shocks. I find the dynamic interaction between the insurer’s balance sheet and its capital rationing resulting from loss shocks. The model generates a non-cyclical behavior of output changes in the insurance market, and this suggests the current asymmetric, unpredictable and random underwriting cycles are temporary responses to loss shocks
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