| Abstract: |
| The insurer chooses the investment and reinsurance strategy to minimize the probability of ruin, in a diffusion model for the uncontrolled surplus. The reinsurance contract is irreversible and costly with transaction cost at purchase and premium proportional to the size of ceded risk. The optimal strategy entails constant dollar amount invested in the financial asset correlated with the actuarial risk and reinsurance purchase only when the surplus is greater than the endogenous free boundary. For sufficiently large level of ceded risk, reinsurance becomes ineffective for reducing ruin probability due to the long term premium commitment |
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