Optimal investment and reinsurance policies in insurance markets under the effect of inside information
Article first published online: 14 SEP 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Applied Stochastic Models in Business and Industry
Volume 28, Issue 6, pages 506–528, November/December 2012
How to Cite
Baltas, I.D., Frangos, N.E. and Yannacopoulos, A.N. (2012), Optimal investment and reinsurance policies in insurance markets under the effect of inside information. Appl. Stochastic Models Bus. Ind., 28: 506–528. doi: 10.1002/asmb.925
- Issue published online: 26 DEC 2012
- Article first published online: 14 SEP 2011
- Manuscript Accepted: 12 AUG 2011
- Manuscript Revised: 17 JUL 2011
- Manuscript Received: 12 SEP 2010
- Hamilton–Jacobi–Bellman equation;
- proportional reinsurance;
In this paper, we study the problem of optimal investment and proportional reinsurance coverage in the presence of inside information. To be more precise, we consider two firms: an insurer and a reinsurer who are both allowed to invest their surplus in a Black–Scholes-type financial market. The insurer faces a claims process that is modeled by a Brownian motion with drift and has the possibility to reduce the risk involved with this process by purchasing proportional reinsurance coverage. Moreover, the insurer has some extra information at her disposal concerning the future realizations of her claims process, available from the beginning of the trading interval and hidden from the reinsurer, thus introducing in this way inside information aspects to our model. The optimal investment and proportional reinsurance decision for both firms is determined by the solution of suitable expected utility maximization problems, taking into account explicitly their different information sets. The solution of these problems also determines the reinsurance premia via a partial equilibrium approach. Copyright © 2011 John Wiley & Sons, Ltd.