Optimal investment strategy to maximize the expected utility of an insurance company under Cramer-Lundberg dynamic

Abstract

In this work, we examine the combined problem of optimal portfolio selection rules for an insurer in a continuous time model where the surplus of an insurance company is modelled as a compound Poisson process. The company can invest its surplus in a risk free asset and in a risky asset, governed by the Black-Scholes equation. According to utility theory, in a financial market where investors are facing uncertainty, an investor is not concerned with wealth maximization per se but with utility maximization. It is therefore possible to introduce an increasing and concave utility function $\phi(x,t)$ representing the expected utility of a risk averse investor (insurance company). Therefore, the goal of this work is not anymore to maximize the expected portfolio value or minimize the ruin probability or maximizing the expectation of the present value of all dividends paid to the shareholders up to the ruin, but to maximize the expected utility stemming from the wealth during the life contract [0,T]. In this direction, using the Dynamic Programming Principle of the problem, we obtain the Hamilton-Jacobi-Bellman equation by our optimization problem (HJB). Finally, we present numerical solutions in some cases, obtaining as optimal strategy the well known Merton's strategy.