Some Optimisation Problems in Insurance with a Terminal Distribution Constraint

TL;DR

This paper explores optimal strategies for insurance companies to manage surplus under a terminal normal distribution constraint, including dividend payments and reinsurance, with explicit solutions in various settings.

Contribution

It provides explicit optimal strategies for dividend and reinsurance management under terminal distribution constraints, a novel approach in insurance optimization.

Findings

Explicit formulas for optimal dividend strategies in continuous and discrete time.

Analysis of reinsurance strategies to minimize ruin probability under VaR and ES constraints.

Comparison of strategies' effectiveness in different operational scenarios.

Abstract

In this paper, we study two optimisation settings for an insurance company, under the constraint that the terminal surplus at a deterministic and finite time $T$ follows a normal distribution with a given mean and a given variance. In both cases, the surplus of the insurance company is assumed to follow a Brownian motion with drift. First, we allow the insurance company to pay dividends and seek to maximise the expected discounted dividend payments or to minimise the ruin probability under the terminal distribution constraint. Here, we find explicit expressions for the optimal strategies in both cases: in discrete and continuous time settings. Second, we let the insurance company buy a reinsurance contract for a pool of insured or a branch of business. To achieve a certain level of sustainability (i.e. the collected premia should be sufficient to buy reinsurance and to pay the occurring claims) the initial capital is set to be zero. We only allow for piecewise constant reinsurance strategies producing a normally distributed terminal surplus, whose mean and variance lead to a given Value at Risk or Expected Shortfall at some confidence level $\alpha$. We investigate the question which admissible reinsurance strategy produces a smaller ruin probability, if the ruin-checks are due at discrete deterministic points in time.