Mark-to-Market Reinsurance and Portfolio Selection: Implications for Information Quality

42 Pages Posted: 3 Feb 2016 Last revised: 3 Jun 2018

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Kyeong Tae Kim

POSTECH

Hyun-Tak Lee

Risk Management Institute (RMI), National University of Singapore (NUS)

Date Written: May 29, 2018

Abstract

This paper develops mark-to-market reinsurance and investment strategies for insurers with partial information on expected returns of the risky asset. Motivated by the recent changes in regulatory capital requirement for insurers, we show that both strategies depend crucially on prior belief on the financial market status today, whereas variation in posterior beliefs serves to prevent the probable pro-cyclical investment shortfall from optimistic prior belief. By comparing such a setup with a competitive model under complete information, we find that information quality difference between the two models hinges on how big the risk-adjusted forward investment premium is relative to the reinsurance premium. The key implication is that partial information on the model parameters leads to far more conservative strategies than does complete information typically used in the conventional studies.

Keywords: Information quality; Mark-to-market strategy; Optimal reinsurance; Optimal portfolio; Partial information

JEL Classification: G11, G12, G22

Suggested Citation

Jang, Bong-Gyu and Kim, Kyeong Tae and Lee, Hyun-Tak, Mark-to-Market Reinsurance and Portfolio Selection: Implications for Information Quality (May 29, 2018). Available at SSRN: https://ssrn.com/abstract=2727075 or http://dx.doi.org/10.2139/ssrn.2727075

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

Hyun-Tak Lee

Risk Management Institute (RMI), National University of Singapore (NUS) ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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