Optimal reinsurance and investment strategy under CEV model with fractional power utility function

Maulana Malik, Siti Sabariah Abas, Mustafa Mamat, Sukono, Agung Prabowo

Research output: Contribution to journalArticlepeer-review

Abstract

This paper studies the optimal reinsurance and investment problem for insurance companies (insurers) with a fractional power utility function. Assuming that the insurer surplus process is approximated by Brownian motion with drift, the insurer may purchase reinsurance and invest the capital in a financial market consisting of risk-free asset and risk asset whose price is modeled by constant elasticity variance (CEV) model. The insurer’s objective is to maximize the expected fractional power utility from terminal wealth. The explicit expressions for optimal reinsurance-investment strategy and value function are determined by the stochastic approach, which uses the equations of Hamilton-Jacobi-Bellman. Finally, the numerical simulations are presented to show the effects of model parameters on the insurer’s optimal reinsurance and investment strategies.

Original languageEnglish
Article numberEL_28_4_08
Pages (from-to)1041-1046
Number of pages6
JournalEngineering Letters
Volume28
Issue number4
Publication statusPublished - Dec 2020

Keywords

  • Constant elasticity variance
  • Fractional power utility
  • Hamilton-Jacobi-Bellman equation
  • Insurer
  • Reinsurance
  • Stochastic approach
  • Surplus process

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