Optimal reinsurance strategy under fixed cost and delay
We consider an optimal reinsurance strategy in which the insurance company (1) monitors the dynamics of its surplus process, (2) optimally chooses a time to begin negotiating with a reinsurer to buy quota-share, or proportional, reinsurance, which introduces an implementation delay (denoted by ), (3) chooses the optimal proportion at the beginning of the negotiation period, and (4) pays a fixed transaction cost when the contract is signed ( units of time after negotiation begins). This setup leads to a combined problem of optimal stopping and stochastic control. We obtain a solution for the value function and the corresponding optimal strategy, while demonstrating the solution procedure in detail. It turns out that the optimal continuation region is a union of two intervals, a rather rare occurrence in optimal stopping. Numerical examples are given to illustrate our results and we discuss relevant economic insights from this model.
Year of publication: |
2009
|
---|---|
Authors: | Egami, Masahiko ; Young, Virginia R. |
Published in: |
Stochastic Processes and their Applications. - Elsevier, ISSN 0304-4149. - Vol. 119.2009, 3, p. 1015-1034
|
Publisher: |
Elsevier |
Keywords: | Reinsurance strategy Optimal stopping Implementation delay Transaction cost |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Indifference prices of structured catastrophe (CAT) bonds
Egami, Masahiko, (2008)
-
Indifference prices of structured catastrophe (CAT) bonds
Egami, Masahiko, (2008)
-
Indifference prices of structured catastrophe (CAT) bonds
Egami, Masahiko, (2008)
- More ...