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arXiv · 1704.08234

Optimal excess-of-loss reinsurance and investment problem for an insurer with default risk under a stochastic volatility model

Nian Yao·Zhiming Yang
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Abstract

In this paper, we study an optimal excess-of-loss reinsurance and investment problem for an insurer in defaultable market. The insurer can buy reinsurance and invest in the following securities: a bank account, a risky asset with stochastic volatility and a defaultable corporate bond. We discuss the optimal investment strategy into two subproblems: a pre-default case and a post-default case. We show the existence of a classical solution to a pre-default case via super-sub solution techniques and give an explicit characterization of the optimal reinsurance and investment policies that maximize the expected CARA utility of the terminal wealth. We prove a verification theorem establishing the uniqueness of the solution. Numerical results are presented in the case of the Scott model and we discuss economic insights obtained from these results.

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Nian Yao, Zhiming Yang. 2017-04-26. Optimal excess-of-loss reinsurance and investment problem for an insurer with default risk under a stochastic volatility model. https://arxiv.org/abs/1704.08234

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