Enhancing insurer value through reinsurance, dividends and capital optimization: an expected utility approach

The paper investigates the existence of risk management incentives in insurance in the presence of insolvency cost using an expected utility approach. The insurer's objective is to maximize shareholder value under a solvency constraint imposed by a regulatory authority. In this paper we show that the maximization of shareholder value under solvency restrictions is approximately equivalent to the maximization of shareholder value using utility approach with a special isoelastic utility function. Using this isoelastic utility function we maximize the expected present value of utility of future dividends by three uncontrolled variables: dividend rate, leverage ratio and retention level of quota share proportional reinsurance, for the surplus which follows a geometric Brownian motion.

Enterprise Risk & Group Actuary Division of Insurance Australia Group (IAG),
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ResourceID: 69785

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