The Determination of the Necessary Economic Capital, Investment and Reinsurance Strategies for Insurance Companies
26 Pages Posted: 24 Oct 2011 Last revised: 29 Jan 2012
Date Written: January 28, 2012
In this article, we establish integrated models to determine the necessary economical capital, investment and reinsurance strategies concurrently based on the criteria of minimizing the total frictional cost, Solvency II and Swiss Solvency Test respectively. We consider different structures of assets and liabilities for both property-liability insurers and life insurers. We numerically analyze the effect of several critical parameters on the optimal investment and reinsurance strategies and the capital level. The results show that if the reinsurance cost is low or the frictional cost of capital is high or both, reinsurance can be an effective instrument for capital management. The results also show that the regulatory capital level based on either Solvency II or Swiss Solvency Test tends to be more prudent to the risks than the capital level determined by only minimizing the total frictional cost.
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