Robust optimal consumption, investment and reinsurance for recursive preferences
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arXiv
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| Main Authors: | , , |
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| Format: | Preprint |
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2025
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| _version_ | 1866915598741536768 |
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| author | Dadzie, Elizabeth Kuissi-Kamdem, Wilfried Ndengo, Marcel |
| author_facet | Dadzie, Elizabeth Kuissi-Kamdem, Wilfried Ndengo, Marcel |
| contents | This paper investigates a robust optimal consumption, investment, and reinsurance problem for an insurer with Epstein-Zin recursive preferences operating under model uncertainty. The insurer's surplus follows the diffusion approximation of the Cramér-Lundberg model, and the insurer can purchase proportional reinsurance. Model ambiguity is characterised by a class of equivalent probability measures, and the insurer, being ambiguity-averse, aims to maximise utility under the worst-case scenario. By solving the associated coupled forward-backward stochastic differential equation (FBSDE), we derive closed-form solutions for the optimal strategies and the value function. Our analysis reveals how ambiguity aversion, risk aversion, and the elasticity of intertemporal substitution (EIS) influence the optimal policies. Numerical experiments illustrate the effects of key parameters, showing that optimal consumption decreases with higher risk aversion and EIS, while investment and reinsurance strategies are co-dependent on both financial and insurance market parameters, even without correlation. This study provides a comprehensive framework for insurers to manage capital allocation and risk transfer under deep uncertainty. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2511_03031 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Robust optimal consumption, investment and reinsurance for recursive preferences Dadzie, Elizabeth Kuissi-Kamdem, Wilfried Ndengo, Marcel Optimization and Control Risk Management 91B05, 91G05, 91G10, 91G80s This paper investigates a robust optimal consumption, investment, and reinsurance problem for an insurer with Epstein-Zin recursive preferences operating under model uncertainty. The insurer's surplus follows the diffusion approximation of the Cramér-Lundberg model, and the insurer can purchase proportional reinsurance. Model ambiguity is characterised by a class of equivalent probability measures, and the insurer, being ambiguity-averse, aims to maximise utility under the worst-case scenario. By solving the associated coupled forward-backward stochastic differential equation (FBSDE), we derive closed-form solutions for the optimal strategies and the value function. Our analysis reveals how ambiguity aversion, risk aversion, and the elasticity of intertemporal substitution (EIS) influence the optimal policies. Numerical experiments illustrate the effects of key parameters, showing that optimal consumption decreases with higher risk aversion and EIS, while investment and reinsurance strategies are co-dependent on both financial and insurance market parameters, even without correlation. This study provides a comprehensive framework for insurers to manage capital allocation and risk transfer under deep uncertainty. |
| title | Robust optimal consumption, investment and reinsurance for recursive preferences |
| topic | Optimization and Control Risk Management 91B05, 91G05, 91G10, 91G80s |
| url | https://arxiv.org/abs/2511.03031 |