Insurance Companies Portfolio Optimization with Possibilities of Recovery after Ruin: A Case of Exponential Utility Function

Abstract

In this paper, we propose and analyze the perturbed mathematical model for modeling the portfolio of insurance companies with possibilities of recovery after ruin. Return on investment and refinancing are used as approaches for overcoming ruin. The model is analyzed for different cases of possibilities of recovery after ruin within [0, 1]. The results indicate that the return on investment plays an important role in reducing the ultimate ruin and that as the possibility of recovery for insurance companies increases the return on investment reduces the ruin at a fast rate. Finally, the study recommends that all insurance companies should have well trained staff in risk management who can study the company’s portfolio and gives suggestions to managers on how to avoid or minimize ruin and how to recover in case ruin occurs.