A Note on Realistic Dividends in Actuarial Surplus Models

Abstract

Abstract:Because of the profitable nature of risk businesses in the long term, de Finetti suggested that surplus models should allow for cash leakages, as otherwise the surplus would unrealistically grow (on average) to infinity. These leakages were interpreted as 'dividends'. Subsequent literature on actuarial surplus models with dividend distribution has mainly focussed on dividend strategies that either maximise the expected present value of dividends until ruin or lead to a probability of ruin that is less than one (see Albrecher and Thonhauser, Avanzi for reviews). An increasing number of papers are directly interested in modelling dividend policies that are consistent with actual practice in financial markets. In this short note, we review the corporate finance literature with the specific aim of fleshing out properties that dividend strategies should ideally satisfy, if one wants to model behaviour that is consistent with practice.

On the Distribution of the Excedents of Funds With Assets and Liabilities in Presence of Solvency and Recovery Requirements

“…Note that this recovery requirement has another advantage, which is one reason which had motivated Avanzi and Wong (2012) to introduce it at first. In a diffusion environment (such as in this paper), absence of recovery requirement would lead to erratic periods of dividend payments if the barrier is equal to α 1 (this will sometimes be the case, see Avanzi et al, 2017), which is unrealistic (see also Avanzi et al, 2016, for a discussion of this). Such erratic dividend payments with optimal barrier strategies was another criticism formulated by Gerber (1974).…”

Personal Non-Life Insurance Decisions and the Welfare Loss From Flat Deductibles

“…It has been argued that the dividend decision process of the insurance company should not be optimized with respect to a utility function as there is not one distinct individual whose utility function can appropriately represent the corporate decision process, see for example, the survey paper Avanzi et al (2016). Only from an individual's point of view, the optimization of utility of consumption financed by a wealth process influenced by non-life risk, partly mitigated by the purchase of insurance contracts, appears to be natural.…”

Personal Non-Life Insurance Decisions and the Welfare Loss From Flat Deductibles

“…It has been argued that the dividend decision process of the insurance company should not be optimized with respect to a utility function as there is not one distinct individual whose utility function can appropriately represent the corporate decision process, see e.g. the survey paper Avanzi et al (2016). Only from an individual's point of view, the optimization of utility of consumption financed by a wealth process influenced by non-life risk, partly mitigated by the purchase of insurance contracts, appears to be natural.…”