Optimal reinsurance with a systemic surplus shock

Jung, Kwangmin; Park, Seyoung

Abstract

We examine the optimal reinsurance and asset allocation strategies for an insurer who minimizes the ruin probability and faces a systemic surplus shock. Analytically tractable solutions are obtained when this shock occurs at an uncertain time. We then demonstrate that the systemic surplus shock results in a nonstandard form of market incompleteness, which alters both qualitative and quantitative features of existing strategies without the surplus shock. In particular, a specific form of the marginal value for the insurer's minimized ruin probability plays a key role in the characterization of optimal policies with the systemic surplus shock.

Citation

Jung, K., & Park, S. (2024). Optimal reinsurance with a systemic surplus shock. Economics Letters, 244, Article 112013. https://doi.org/10.1016/j.econlet.2024.112013

• Journal Article Type: Article
• Acceptance Date: Oct 4, 2024
• Online Publication Date: Oct 10, 2024
• Publication Date: 2024-11
• Deposit Date: Oct 16, 2024
• Publicly Available Date: Oct 22, 2024
• Journal: Economics Letters
• Print ISSN: 0165-1765
• Electronic ISSN: 1873-7374
• Publisher: Elsevier
• Peer Reviewed: Not Peer Reviewed
• Volume: 244
• Article Number: 112013
• DOI: https://doi.org/10.1016/j.econlet.2024.112013
• Keywords: Reinsurance; Asset Allocation; Systemic Risk; Ruin Probability JEL Codes: G11; G22 *
• Public URL: https://nottingham-repository.worktribe.com/output/40582664
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S016517652400497X?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Optimal reinsurance with a systemic surplus shock; Journal Title: Economics Letters; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.econlet.2024.112013; Content Type: article; Copyright: © 2024 The Authors. Published by Elsevier B.V.