Mark-to-Market Reinsurance and Portfolio Selection: Implications for Information Quality
42 Pages Posted: 3 Feb 2016 Last revised: 3 Jun 2018
Date Written: May 29, 2018
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: Suggested Citation