Robust investment for insurers with correlation ambiguity

Abstract

This paper investigates the investment decision of insurers when there is ambiguous correlation between the financial market and the insurance business. The robust decision model that accommodates correlation ambiguity between a risky financial asset and the insurer’s non-tradable surplus is solved under the G-expectation framework. We find that correlation ambiguity leads to a more conservative investment strategy in financial assets, providing a plausible explanation for insurers’ under- or zero investment in the financial market during normal economic times. We also show that the range of priors set of correlation coefficients can be statistically inferred, and insurers will quit the financial market when the range of priors set exceeds a certain level, which is more likely to happen when the remaining investment horizon is long.