Optimal investment and reinsurance to reach a bequest goal with random time solvency regulation

Abstract

ABSTRACT This paper studies optimal investment and proportional reinsurance policies for an insurer with Markov regime-switching model and random time solvency regulation. The goal of the insurer is to maximise the probability that its wealth exceeds a predetermined level l before the regulatory time arrives. By constructing an auxiliary control problem without regime switching, together with the classical results on Hamilton-Jacobi-Bellman (HJB) equation and fixed-point method, we prove the regularity of the value function. When the current state of the Markov chain is given, we found that the optimal policies for an insurer in a multiple-regime market is the same as those in a single-regime market. Explicit optimal policies can be derived when the premium is calculated by the expectation principle. For more general cases, numerical schemes for value functions and feedback optimal policies are given by the Markov chain approximating method.