Optimal Investment-Reinsurance Strategies for Insurers with Mean-Reversion and Mispricing under Variance Premium Principle

Abstract

This paper considers a robust optimal reinsurance-investment problem for an insurer with mispricing and model ambiguity. The surplus process is described by a classical Cramer-Lunderg model and the financial market contains a market index, a risk-free asset and a pair of mispriced stocks, where the expected return rate of the stocks and the mispricing follow mean reverting processes which take into account liquidity constraints. In particular, both the insurance and reinsurance premium are assumed to be calculated via the variance premium principle. By employing the dynamic programming approach, we derive the explicit optimal robust reinsurance-investment strategy and the optimal value function.