Optimal Reinsurance and Asset Allocation under Regime Switching
Posted: 16 Sep 2013 Last revised: 23 Mar 2015
Date Written: September 16, 2013
We investigate optimal reinsurance and asset allocation strategies for an insurer who is concerned about changes in economic conditions. Numerical examples with carefully estimated parameters show that optimal reinsurance and asset allocation strategies for an insurer could be non-myopic, meaning that they could be affected by future market conditions, and change drastically according to current economic conditions. However, an insurer with poor financial prudence might be myopic so that the optimal strategies are similar to those of the single-regime model. We also show that drastic changes of the correlation between stock prices and insurance claims, investment opportunity, and loading factors might significantly affect optimal reinsurance strategy, asset allocation strategy, or both, of insurance companies.
Keywords: reinsurance, asset allocation, portfolio theory, insurance company, business cycle, insurance claim, regime switch
JEL Classification: C61, C63, E32, G11, G22
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