Optimal Investment-Reinsurance Strategy with Exchange Rate Risk under Variance Premium Principl |
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Authors: | HUANG Chan WANG Wei WEN Limin |
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Institution: | School of Mathematics and Statistics, Ningbo University, Ningbo, 315211, China; School of Mathematics and Information Science, Jiangxi Normal University, Nanchang, 330022, China |
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Abstract: | It is assumed that both an insurance company and a reinsurance company adopt the variance premium principle to collect premiums. Specifically, an insurance company is allowed to investment not only in a domestic risk-free asset and a risky asset, but also in a foreign risky asset. Firstly, we use a geometry Brownian motion to model the exchange rate risk, and assume that the insurance company could control the insurance risk by transferring the insurance business
into the reinsurance company. Secondly, the stochastic dynamic programming principle is used to study the optimal investment and reinsurance problems
in two situations. The first is a diffusion approximation risk model and the second is a classical risk model. The optimal investment and reinsurance strategies are obtained under these two situations. We also show that the exchange rate risk has a great impact on the insurance company's investment strategies, but has no effect on the reinsurance strategies. Finally, a sensitivity analysis of some parameters is provided. |
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Keywords: | variance premium principle exchage rate risk optimal investment reinsurance |
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