Optimization Models for Insurance Portfolio Optimization in the Presence of Background Risk
Published: 2011-10-04
Page: 114-127
Issue: 2011 - Volume 1 [Issue 2]
E. O. Oyatoye *
Department of Business Administration, University of Lagos, Nigeria.
K. K. Arogundade
Department of Business Administration, University of Ado Ekiti, Ado Ekiti.
*Author to whom correspondence should be addressed.
Abstract
The liability stream of insurance companies often stretches several years into the future. Therefore, there is always the need to determine a portfolio of bonds or other assets whose cash-flows replicate those of the liability stream. Insurance regulatory authorities require that insurance companies must demonstrate solvency. To achieve this, an insurance company needs to determine a fair market value of its liability by finding a replicating portfolio consisting of default-free bonds. This paper presents a class of optimization models that could be employed for portfolio optimization in the presence of background risk.
Keywords: Optimization models, insurance portfolio optimization, background risk