On the optimal dividend problem for a spectrally negative Lévy process
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Publication:2467114
Abstract: In this paper we consider the optimal dividend problem for an insurance company whose risk process evolves as a spectrally negative L'{e}vy process in the absence of dividend payments. The classical dividend problem for an insurance company consists in finding a dividend payment policy that maximizes the total expected discounted dividends. Related is the problem where we impose the restriction that ruin be prevented: the beneficiaries of the dividends must then keep the insurance company solvent by bail-out loans. Drawing on the fluctuation theory of spectrally negative L'{e}vy processes we give an explicit analytical description of the optimal strategy in the set of barrier strategies and the corresponding value function, for either of the problems. Subsequently we investigate when the dividend policy that is optimal among all admissible ones takes the form of a barrier strategy.
In classical collective risk theory the surplus process of an insurance company is described by the Cramer-Lundberg model, has positive first moment and has therefore the unrealistic property that it converges to infinity with probability 1. In answer to this objection, De Finetti (1957) introduced the divident barrier model, in which all surpluses a given level are transferred to a beneficiary. In mathematical finance and actuarial literature there is a good deal of work on divident barrier models. A drawback of the divident barrier model is that under this model the risk process will down-cross the level zero with probability 1. In this paper, the authors approach the divident problem from the point of view of a general spectrally negative Lévy process. Drawing on the fluctuation theory of spectrally negative Lévy processes they give an explicit analytical description of the optimal strategy in the set of barrier strategies and the corresponding value function. They conclude the paper with some explicit examples in the classical and `bail-out' setting.
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