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Analysis of the Compound Poisson Surplus Model with Liquid Reserves, Interest and Dividends

Published online by Cambridge University Press:  09 August 2013

Jun Cai ,
Runhuan Feng  and
Gordon E. Willmot
Jun Cai
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, CanadaN2L 3G1, E-Mail: jcai@uwaterloo.ca
Runhuan Feng
Affiliation:
Department of Mathematical Sciences, University of Wisconsin, Milwaukee, USA, P.O.Box 413, Milwaukee, WI, USA 53202-0413, E-Mail: fengr@uwm.edu
Gordon E. Willmot
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, CanadaN2L 3G1, E-Mail: gewillmo@uwaterloo.ca
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Abstract

The paper incorporates liquid reserves, interest and dividends in the compound Poisson surplus model. When an insurer's surplus is below a certain level, it is kept as liquid reserves. As the surplus attains the level, the excess of the surplus above the level will earn interest at a constant interest rate. If the surplus continues to surpass a higher level, the excess of the surplus above this higher level will be paid out as dividends to the insurer's shareholders at a constant dividend rate or by the threshold strategy. The lower and higher levels are called the liquid reserve level and the threshold level, respectively.

This paper is to discuss the interactions of the liquid reserve level, the interest rate, the threshold level, and the dividend rate in the proposed risk model by studying the expected discounted penalty function and the expected present value of dividends paid up to the time of ruin. We derive expressions for the solutions to both quantities via the approach of integro-differential equation systems. We show that the dividend-penalty identity (Gerber et al. 2006, ASTIN Bulletin) still holds for the threshold strategy with liquid reserves and interest. We illustrate these results by deriving explicit solutions to the probability of ultimate ruin under the threshold strategy when claim sizes are exponentially distributed. In the end, we also discuss the impact of the liquid reserve level, the interest rate, the threshold level, and the dividend rate on the ruin probability by numerical examples.

Keywords

Liquid reservethreshold strategybarrier strategydiscounted penalty functiondividends paid up to ruindividend-penalty identityruin probability
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 39 , Issue 1 , May 2009 , pp. 225 - 247
Copyright
Copyright © International Actuarial Association 2009

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