Optimal investment strategies and profit shares distributions: A stochastic control approach

With the advent of Solvency II regulations in 2016, European insurance companies are tasked with calculating technical provisions by either using a standard formula given by regulators or developing their own internal model. This paper first reviews a model adapted to Solvency II regulations for an insurance company’s participating contracts, which was proposed by Hainaut [1]. The objective of the insurer is to optimize profit shares distributions and asset allocation strategies. In this setting, a stochastic control approach is used to formulate a dynamic portfolio optimization problem. The insurer invests in an account or bond that is risk-free, she also invests in a risky asset that is based on the Black-Scholes model. A closed form solution to the problem under a power utility function on future profit shares and the insurer’s future economic wealth is calculated. The paper ends with a numerical example, where Tesla and Apple share prices are used as the insurer’s risky asset, in order to test the usability of the model in industry.