Optimal Reinsurance and Asset Allocation under Regime Switching

Posted: 16 Sep 2013 Last revised: 23 Mar 2015

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Kyeong Tae Kim

POSTECH

Date Written: September 16, 2013

Abstract

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

Suggested Citation

Jang, Bong-Gyu and Kim, Kyeong Tae, Optimal Reinsurance and Asset Allocation under Regime Switching (September 16, 2013). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2326366 or http://dx.doi.org/10.2139/ssrn.2326366

Bong-Gyu Jang (Contact Author)

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Kyeong Tae Kim

POSTECH ( email )

Nam-gu, Hyoja-dong
Pohang, Kyung-Buk
Korea

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