Optimal mean–variance investment/reinsurance with common shock in a regime-switching market

Abstract

In this paper, we consider the problem of optimal investment-reinsurance with two dependent classes of insurance risks in a regime-switching financial market. In our model, the two claim-number processes are correlated through a common shock component, and the market mode is classified into a finite number of regimes. We also assume that the insurer can purchase proportional reinsurance and invest its surplus in a financial market, and that the values of the model parameters depend on the market mode. Using the techniques of stochastic linear-quadratic control, under the mean–variance criterion, we obtain analytic expressions for the optimal investment and reinsurance strategies, and derive closed-form expressions for the efficient strategies and the efficient frontiers which are based on the solutions to some systems of linear ordinary differential equations. Finally, we carry out a numerical study for illustration purpose.