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

See all articles by Krzysztof Ostaszewski

Krzysztof Ostaszewski

Illinois State University

Hong Mao

Shanghai Second Polytechnic University

Date Written: January 28, 2012

Abstract

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.

Suggested Citation

Ostaszewski, Krzysztof and Mao, Hong, The Determination of the Necessary Economic Capital, Investment and Reinsurance Strategies for Insurance Companies (January 28, 2012). Available at SSRN: https://ssrn.com/abstract=1941457 or http://dx.doi.org/10.2139/ssrn.1941457

Krzysztof Ostaszewski (Contact Author)

Illinois State University ( email )

Department of Mathematics
Normal, IL 61790-4520
United States
+1-309-438-7226 (Phone)
+1-309-438-5866 (Fax)

HOME PAGE: http://math.illinoisstate.edu/krzysio

Hong Mao

Shanghai Second Polytechnic University ( email )

No.2360, Jinhai Road
Shanghai, 201209
China

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