Minimizing capital injections by investment and reinsurance for a piecewise deterministic reserve process model

• Published in: Scandinavian actuarial journal Vol. 2018; no. 10; pp. 907 - 932
• Main Authors: Antonello, Michele, Cipani, Luca, Runggaldier, Wolfgang J.
• Format: Journal Article
• Language: English
• Published: Stockholm Taylor & Francis 26.11.2018; Taylor & Francis Ltd
• Subjects: Actuarial science; Approximation; approximation methods; minimizing capital injections; Reinsurance; Reinsurance and investment; value iteration
• ISSN: 0346-1238; 1651-2030
• DOI: 10.1080/03461238.2018.1471001

We consider the possibility for an insurance company to rely on capital injections to bring the reserve back to a given level if it has fallen below it and study the problem of dynamically choosing the reinsurance level and the investment in the financial market in order to minimize the expected discounted total amount of capital injection. The reserve process is described by a piecewise deterministic process, where the random discontinuities are triggered by the arrival of a claim or by a change in the prices of the risky assets in which the company invests. The capital injections, combined with the specific model, make the problem non-linear and difficult to solve via an HJB approach. The emphasis here is on making the actual computation of a solution possible by value iteration combined with an approximation based on discretization. This leads to a nearly optimal solution with an approximation that can be made arbitrarily precise. Numerical results show the feasibility of the proposed approach.