Optimal Investment and Proportional Reinsurance in a Regime-Switching Market Model under Forward Preferences

Abstract

In this paper, we study the optimal investment and reinsurance problem of an insurance company whose investment preferences are described via a forward dynamic exponential utility in a regime-switching market model. Financial and actuarial frameworks are dependent since stock prices and insurance claims vary according to a common factor given by a continuous time finite state Markov chain. We construct the value function and we prove that it is a forward dynamic utility. Then, we characterize the optimal investment strategy and the optimal proportional level of reinsurance. We also perform numerical experiments and provide sensitivity analyses with respect to some model parameters.

Keywords

• forward dynamic utility
• optimal investment
• optimal proportional reinsurance
• stochastic factor-model
• stochastic optimization