Optimal Investment‐Reinsurance Design Under Asymmetric Nash Bargaining in a Square Root Factor Process for Jump‐Diffusion Risk Model

ABSTRACT This paper studies an investment‐reinsurance contract between an insurer and a reinsurer with asymmetric bargaining power. We assume that the surplus of the insurer follows a jump‐diffusion process. To reduce the risk of claims, the insurer can purchase proportional reinsurance, with the reinsurance premium calculated based on the expected value principle. The surplus of the insurer and the reinsurer can be allocated to a financial market consisting of a risk‐free asset and a risky asset, respectively. The price processes of the insurer's and reinsurer's risky assets satisfy different square root factor processes. To consider the benefits of both the insurer and the reinsurer, the optimization problem is formulated as an asymmetric Nash bargaining game. To maximize the weighted product of the expected exponential utility of the terminal wealth of both parties, explicit expressions for the Pareto‐optimal strategy and the corresponding value function are derived by employing stochastic control techniques and the Hamilton‐Jacobi‐Bellman (HJB) equation. In addition, we provide equilibrium strategies under several special cases, including cases where only the insurer or the reinsurer is considered, as well as models under the CEV (Constant Elasticity of Variance) model and the Heston stochastic volatility model. Finally, numerical examples illustrate the impact of bargaining power on optimal strategy.

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Publication Details

Journal
Mathematical Methods in the Applied Sciences
Published
2026-04-13
DOI
https://doi.org/10.1002/mma.70743
Primary Topic
Probability and Risk Models
Type
article
Field-Weighted Citation Impact
0.00

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article

Optimal Investment‐Reinsurance Design Under Asymmetric Nash Bargaining in a Square Root Factor Process for Jump‐Diffusion Risk Model

Jia Yao, Junna Bi, Fengzhu Chang
Mathematical Methods in the Applied Sciences
Probability and Risk Models
article

Optimal Investment‐Reinsurance Design Under Asymmetric Nash Bargaining in a Square Root Factor Process for Jump‐Diffusion Risk Model

Jia Yao, Junna Bi, Fengzhu Chang
article en

Abstract

ABSTRACT This paper studies an investment‐reinsurance contract between an insurer and a reinsurer with asymmetric bargaining power. We assume that the surplus of the insurer follows a jump‐diffusion process. To reduce the risk of claims, the insurer can purchase proportional reinsurance, with the reinsurance premium calculated based on the expected value principle. The surplus of the insurer and the reinsurer can be allocated to a financial market consisting of a risk‐free asset and a risky asset, respectively. The price processes of the insurer's and reinsurer's risky assets satisfy different square root factor processes. To consider the benefits of both the insurer and the reinsurer, the optimization problem is formulated as an asymmetric Nash bargaining game. To maximize the weighted product of the expected exponential utility of the terminal wealth of both parties, explicit expressions for the Pareto‐optimal strategy and the corresponding value function are derived by employing stochastic control techniques and the Hamilton‐Jacobi‐Bellman (HJB) equation. In addition, we provide equilibrium strategies under several special cases, including cases where only the insurer or the reinsurer is considered, as well as models under the CEV (Constant Elasticity of Variance) model and the Heston stochastic volatility model. Finally, numerical examples illustrate the impact of bargaining power on optimal strategy.

Mathematical Methods in the Applied Sciences
East China Normal University (CN)
National Natural Science Foundation of China
Decent work and economic growth
Openalex Percentile: Top 20%
Probability and Risk Models
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