Optimal investment-dividend policy of an insurance firm under regulation

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Abstract
An insurance decision model including intervention by a regulating agency is defined. The insurance firm's problem is to establish an investment policy as well as a dividend strategy. Regulation is exercised by a minimal barrier policy for cash holding and penalities for violating this barrier. The joint Insurance Firm-Regulating Agency problem is discussed by using concepts drawn from Stackleberg strategies in game theory. As in the classical model of collective risk theory it is assumed that premium payments are received deterministically from policyholders at a constant rate, while the claim process is determined by a Compound Poisson process. Finally a diffusion approximation is used in order to obtain tractable results for a general claim size distribution.