Optimal management of an insurer's exposure in a competitive general insurance market

Emms, P. & Haberman, S. (2009). Optimal management of an insurer's exposure in a competitive general insurance market. North American Actuarial Journal, 13(1), pp. 77-105. doi: 10.1080/10920277.2009.10597541

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Abstract

The qualitative behavior of the optimal premium strategy is determined for an insurer in a finite and an infinite market using a deterministic general insurance model. The optimization problem leads to a system of forward-backward differential equations obtained from Pontryagin’s Maximum Principle. The focus of the modelling is on how this optimization problem can be simplified by the choice of demand function and the insurer’s objective. Phase diagrams are used to characterize the optimal control. When the demand is linear in the relative premium, the structure of the phase diagram can be determined analytically. Two types of premium strategy are identified for an insurer in an infinite market, and which is optimal depends on the existence of equilibrium points in the phase diagram. In a finite market there are four more types of premium strategy, and optimality depends on the initial exposure of the insurer and the position of a saddle point in the phase diagram. The effect of a nonlinear demand function is examined by perturbing the linear price function. An analytical optimal premium strategy is also found using inverse methods when the price function is nonlinear.

Item Type: Article
Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis Group in North American Actuarial Journal in 2009, available online at: http://www.tandfonline.com/10.1080/10920277.2009.10597541
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/4072

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