Optimal per-loss reinsurance and investment to minimize the probability of drawdown

TL;DR

This paper derives explicit optimal reinsurance and investment strategies to minimize the probability of drawdown in a multi-class insurance risk model with dependent claim processes, considering different reinsurance principles.

Contribution

It provides closed-form solutions for optimal strategies in a correlated multi-class insurance model, extending to multiple classes and analyzing different reinsurance principles.

Findings

Optimal excess-of-loss reinsurance under expected value principle.

Optimal quota-share reinsurance under variance premium principle.

Explicit strategies for models with multiple dependent insurance classes.

Abstract

In this paper, we study an optimal reinsurance-investment problem in a risk model with two dependent classes of insurance business, where the two claim number processes are correlated through a common shock component. We assume that the insurer can purchase per-loss reinsurance for each line of business and invest its surplus in a financial market consisting of a risk-free asset and a risky asset. Under the criterion of minimizing the probability of drawdown, the closed-form expressions of the optimal reinsurance-investment strategy and the corresponding value function are obtained. We show that the optimal reinsurance strategy is in the form of pure excess-of-loss reinsurance strategy under the expected value principle, and under the variance premium principle, the optimal reinsurance strategy is in the form of pure quota-share reinsurance. Furthermore, we extend our model to the case where the insurance company involves $n$ $(n\geq3)$ dependent classes of insurance business and the optimal results are derived explicitly as well.