Analysis of a drawdown-based regime-switching Lévy insurance model

David Landriault, Bin Li, Shu Li

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, we propose a new drawdown-based regime-switching (DBRS) Lévy insurance model in which the underlying drawdown process is used to model an insurer's level of financial distress over time, and to trigger regime-switching transitions. By some analytical arguments, we derive explicit formulas for a generalized two-sided exit problem. We specifically state conditions under which the survival probability is not trivially zero (which corresponds to the positive security loading conditions of the proposed model). The regime-dependent occupation time until ruin is later studied. As a special case of the general DBRS model, a regime-switching premium model is given further consideration. Connections with other existing risk models (such as the loss-carry-forward tax model of Albrecher and Hipp, 2007) are established.

Original languageEnglish (US)
Pages (from-to)98-107
Number of pages10
JournalInsurance: Mathematics and Economics
Volume60
DOIs
StatePublished - Jan 1 2015

Keywords

  • Drawdown
  • Exit time
  • Lévy process
  • Occupation time
  • Premium change
  • Primary
  • Regime-switching
  • Secondary
  • Two-sided exit problem

ASJC Scopus subject areas

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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