Optimal asset allocation for participating contracts with mortality risk under minimum guarantee

Abstract

We investigate an optimal investment problem of participating insurance contracts with mortality risk under minimum guarantee. The insurer aims to maximize the expected utility of the terminal payoff. Due to its piecewise payoff structure, this optimization problem is a non-concave utility maximization problem. We adopt a concavification technique and a Lagrange dual method to solve the problem and derive the representations of the optimal wealth process and trading strategies. We also carry out some numerical analysis to show how the portfolio insurance constraint impacts the optimal terminal wealth.

Keywords:

• Participating contract
• portfolio insurance
• Lagrange dual method
• concavification

JEL CLASSIFICATION:

• C61
• G11
• C20

Acknowledgments

The authors are very grateful to the anonymous reviewers whose constructive comments and suggestions have helped to improve the article of the previous version.

Funding

The research of Yinghui Dong was supported by the NSF of Jiangsu Province (Grant No. BK20170064), the NNSF of China (Grant No. 11771320), QingLan Project and the scholarship of Jiangsu Overseas Visiting Scholar Program.