Economic Modelling 31 (2013) 625–634

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Economic Modelling
journal homepage: www.elsevier.com/locate/ecmod

Some results on absolute ruin in the perturbed insurance risk model with
investment and debit interests
Wenguang Yu ⁎
School of Insurance, Shandong University of Finance and Economics, Jinan 250014, China

a r t i c l e i n f o a b s t r a c t

Article history: In this paper, we consider a perturbed compound Poisson risk model with investment and debit interests.
Accepted 21 December 2012 Dividends are paid to the shareholders according to a threshold dividend strategy. An alternative assumption
is that when the surplus is negative, a debit interest is applied and when the surplus is above a certain
MSC:
positive level, the insurer could earn investment interest. Integro-differential equations with boundary condi-
91B30
tions satisfied by the moment-generating function, the nth moment of the present value of all dividends until
absolute ruin and the Gerber–Shiu expected discounted penalty function are obtained. Then, we present the
Keywords: explicit expressions for the zero discounted nth moment of the present value of all dividends until absolute
Absolute ruin
ruin in the case of exponential claims. Finally, numerical example is also given to illustrate the effect of the related
Threshold dividend strategy
parameters on the first moment of the present value of all dividends until absolute ruin.
Gerber–Shiu expected discounted penalty
function © 2013 Elsevier B.V. All rights reserved.
Moment-generating function
Confluent hypergeometric function

1. Introduction
The classical risk model perturbed by a diffusion was first intro-
duced by Gerber (1970) and has been further studied by many
authors during the last few years. See, for example, Tsai and Willmot
(2002), Cai and Yang (2005), Wan (2007), Gao and Yin (2008), Wang
and Wu (2008), Albrecher and Thonhausera (2008), Gao and Liu
(2010), Zhang et al. (2010), Liu and Liu (2011), Zhang (2012) and the
references therein. Generally, when the surplus is below zero, we say
that ruin occurs in the classical risk theory. But in reality, when the
surplus falls below zero or the insurer is on deficit, the insurer could
borrow an amount of money equal to the deficits at a debit interest
rate to continue his/her business. Meanwhile, the insurer will repay
the debts continuously from his/her premium income. Thus, the surplus
of the insurer is driven under the debit interest rate when the surplus is
negative. The negative surplus may return to a positive level if debts are
reasonable. However, it is clear that when the negative surplus reaches
some certain level, the surplus is no longer able to recover, and conse-
quently absolute ruin occurs at this moment.
Absolute ruin probability is an important risk measure and has been
frequently considered in recent research works. Dassios and Embrechts
(1989) derive an explicit expression for the probability of absolute ruin
in the case of exponentially distributed individual claim amounts using
a martingale approach. Cai (2007) considers the Gerber–Shiu discounted
penalty function under absolute ruin. Zhu and Yang (2008) obtain
⁎ Tel.: +86 531 8859 6135.
E-mail address: yuwg@mail.sdu.edu.cn.
asymptotic results for a more practical case with a higher borrowing
rate. Yang et al. (2008) investigate the absolute ruin problems in a
multi-layer compound Poisson model with constant interest force. Yuan
and Hu (2008) study the absolute ruin in the compound Poisson risk
model with nonnegative interest and a constant dividend barrier. Wang
et al. (2010) consider the dividend payments in a compound Poisson
risk model with credit and debit interests under absolute ruin. Zhang et
al. (2011) study an absolute ruin model where claims arrive according
to a Markovian arrival process. Li and Liu (2012) investigate a regulated
risk process, which is modeled by interest and linear dividend barrier.
Under absolute ruin, the expected discounted dividends are derived
by PDMP method. Explicit solutions and numerical results are obtained
for exponential claims. Bai and Song (2012) consider the probability of
random time absolute ruin in the renewal risk model with constant pre-
mium rate and constant force of interest. However, there is no work that
deals with perturbed compound Poisson risk model with investment
and threshold strategy under absolute ruin. This motivates us to
investigate such a risk model in this work. Inspired by the work of Gao
and Liu (2010), we will extend their results to absolute ruin risk model.
The rest of the paper is organized as follows. In Section 2, we describe
the risk model. In Section 3, integro-differential equations with boundary
conditions satisfied by the moment-generating function and the nth mo-
ment of the present value of all dividends until absolute ruin are derived.
In Section 4, we give the integro-differential equations satisfied by the
Gerber–Shiu expected discounted penalty function. As applications, in
Section 5, we present explicit expressions for the nth moment of the
present value of all dividends until absolute ruin for exponential claims
when the interest force is zero. Finally, in Section 6, we use numerical

0264-9993/$ – see front matter © 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.econmod.2012.12.020
626 W. Yu / Economic Modelling 31 (2013) 625–634

example to illustrate the impact of the related parameters on the first An alternative expression for Du,b is
moment of the present value of all dividends until absolute ruin.
T b −αt
Du;b ¼ ε∫ e IðU b ðt Þ > bÞdt: ð2:4Þ
0
2. The risk model
It is obvious that 0 b Du,b ≤ ε/α.
In the actuarial literature, the surplus process of an insurance com- In the sequel we will be interested in the moment-generating function
pany is often modeled by the following perturbed compound Poisson
h i
risk process yD
Mðu; y; bÞ ¼ E e u;b ; ð2:5Þ
N ðt Þ
X
U ðt Þ ¼ u þ ct− X n þ σBðt Þ; t ≥0; ð2:1Þ and the nth moment function
n¼1
h i
where u≥0 is the initial surplus, c >0 is the gross premium rate, {N(t), V n ðu; bÞ ¼ E Dnu;b ; n∈N; ð2:6Þ
t≥0} is a Poisson process with jump intensity λ >0 denoting the number
of claims up to time t, and {Xn; n≥1}, representing the sizes of claims with V0(u;b) = 1, and the Gerber–Shiu expected discounted penalty
and independent of {N(t), t≥0}, is a sequence of independent and iden- function
tically distributed nonnegative random variables with a common distri- h
−αT b
bution function F(x) which satisfies F(0)=0 and has a positive mean Φðu; bÞ ¼ E e ωðU b ðT b −Þ; jU b ðT b ÞjÞIðT b b∞ÞjU b ð0Þ ¼ u; ð2:7Þ
∞
μ ¼ ∫ F ðxÞdx > 0. Here, F ðxÞ ¼ 1−F ðxÞ is the survival function of F(x).
0
where, Ub(Tb−) is the surplus prior to absolute ruin and |Ub(Tb)| is the
The net profit condition is given by c>λE[Xi]. σ>0 is a constant,
deficit at absolute ruin. The penalty function ω(x1, x2) is an arbitrary non-
representing the diffusion volatility parameter. {B(t), t≥0} is a standard
negative measurable function defined on (−c1/β, +∞)×(c1/β, +∞).
Brownian motion with B(0)=0. In addition, {N(t), t≥0}, {Xn; n≥1} and
Throughout this paper we assume that M(u, y;b), Vn(u;b) and Φ(u;b)
{B(t), t≥0} are mutually independent.
are sufficiently smooth functions in u and y in their respective domains.
Recently, Gao and Liu (2010) consider the compound Poisson risk
model perturbed by diffusion with constant interest and a threshold
3. Integro-differential equations for M(u, y;b) and Vn(u;b)
dividend strategy. Under the threshold dividend strategy, whenever the
surplus is above b, dividends are paid continuously at a constant rate ε.
Clearly, the moment-generating function M(u, y;b) behaves differ-
However when the surplus is below the level b, no dividends are paid.
ently, depending on whether its initial surplus u is below zero or
Then, integro-differential equations with certain boundary conditions
above the barrier level b. Hence, we write
for the moment-generation function and the nth moment of the present
value of all dividends until ruin are derived. Motivated by the work of 8
< M 2 ðu; y; bÞ; u > b;
Gao and Liu (2010), we consider the following extension of model Mðu; y; bÞ ¼ M 1 ðu; y; bÞ; 0 ≤ u ≤ b; ð3:1Þ
:
(2.1) which is enriched by investment, debit and threshold strategy. M 3 ðu; y; bÞ; −c1 =β b u ≤ 0:
We denote the aggregate dividends paid in the time interval [0, t]
by D(t) and the modified surplus by Ub(t) = U(t) − D(t), which is the For notational convenience, let
insurer's surplus at time t and Ub(0) = u. We assume that the insurer    
pays dividends according to the following strategy governed by h1 ðu; t Þ ¼ ueβt þ c1 eβt −1 =β; h2 ðu; t Þ ¼ ueγt þ c2 eγt −1 =γ:
threshold parameters b > 0 and dividend rate ε > 0. Whenever the
modified surplus Ub(t) is below the level b, no dividends are paid Theorem 3.1. For 0 ≤ u ≤ b,
and the constant premium income rate is c1 > 0. However, when the
2 2
modified surplus Ub(t) is above b, dividends are paid continuously σ ∂ M1 ðu; y; bÞ ∂M1 ðu; y; bÞ ∂M1 ðu; y; bÞ
þ c1 ¼ λM1 ðu; y; bÞ þ αy
at a constant rate ε (0 b ε b c1), meanwhile the insurer could earn 2 ∂u2 ∂u ∂y
interest at investment rate γ > 0. The insurer could borrow an amount " #
u
c
uþ β1
of money equal to the deficit at a debit interest force β when the −λ ∫ M1 ðu−x; y; bÞdF ðxÞ þ ∫ M3 ðu−x; y; bÞdF ðxÞ þ F ðu þ c1 =β Þ ;
0 u
surplus is negative. Meanwhile, the insurer will repay the debts
continuously from her/his premium income. But when the surplus is ð3:2Þ
below −c1/β, the insurer cannot repay all her/his debts for her/his
premium income, then the insurer is no longer allowed to run her/his and, for u > b,
business. Then the modified surplus process Ub(t) is given by
2 2
8 σ ∂ M2 ðu; y; bÞ ∂M2 ðu; y; bÞ ∂M2 ðu; y; bÞ
< ðc2 þ γU b ðt ÞÞdt−dSðt Þ þ σdBðt Þ; U b ðt Þ > b; þ ðγu þ c2 Þ ¼ λM2 ðu; y; bÞ þ αy
2 ∂u2 ∂u ∂y
dU b ðt Þ ¼ c1 dt−dSðt Þ þ σdBðt Þ; 0 ≤ U b ðt Þ ≤ b; ð2:2Þ
: h u−b
ðc1 þ βU b ðt ÞÞdt−dSðt Þ þ σdBðt Þ; −c1 =β ≤ U b ðt Þ ≤ 0; u
−λ ∫ M2 ðu−x; y; bÞdF ðxÞ þ ∫ M1 ðu−x; y; bÞdF ðxÞ
0 u−b
where, c2 = c1 − ε is the net premium rate after dividend payments and
c
uþ 1 i
S(t) = ∑ nN(t)
=1Xn. þ∫
β
M3 ðu−x; y; bÞdF ðxÞ þ F ðu þ c1 =βÞ ; ð3:3Þ
u
We denote the absolute ruin time of the modified surplus process
Ub(t) by Tb, which is defined by
and, for − c1/β ≤ u ≤ 0,
T b ¼ inf ft ≥ 0 : U b ðt Þ ≤ −c1 =βg;

and Tb = ∞ if Ub(t) > −c1/β, for all t ≥ 0. Let α > 0 be the force of
interest valuation, then the present value of all dividends until Tb is σ 2 ∂2 M 3 ðu; y; bÞ ∂M 3 ðu; y; bÞ ∂M 3 ðu; y; bÞ
þ ðβu þ c1 Þ ¼ λM3 ðu; y; bÞ þ αy
defined by 2 ∂u2 ∂u ∂y
 c 
uþ β1
Du;b ¼ ∫ e
T b −αt
dDðt Þ: ð2:3Þ −λ ∫ M 3 ðu−x; y; bÞdF ðxÞ þ F ðu þ c1 =βÞ ; ð3:4Þ
0
0
 W. Yu / Economic Modelling 31 (2013) 625–634 627

Proof. time t0. Thus by conditioning on the time and the amount of the
first claim, we obtain, when −c1/βb u b 0,
h  i
(1) When 0 ≤ u ≤ b, consider a small time interval (0, t], where M 3 ðu; y; bÞ ¼ ð1−λt ÞE M 3 h1 ðu; t Þ þ σBðt Þ; ye−αt ; b
t(t > 0) is sufficiently small so that the surplus process will
h h ðu;t ÞþσBðtÞþc1  
not reach b. In view of the strong Markov property of the sur- þ λt⋅E ∫01
−αt
M3 h1 ðu; t Þ þ σBðt Þ−x; ye ; b dF ðxÞ
β

plus process {Ub(t), t ≥ 0}, we have i

þF ðh1 ðu; t Þ þ σBðt Þ þ c1 =βÞ þ oðt Þ:

h  i ð3:10Þ
−αt
Mðu; y; bÞ ¼ E M U b ðt Þ; ye ; b þ oðt Þ: ð3:5Þ
By Taylor's expansion, we have

h  i ∂M3 ðu; y; bÞ
By conditioning on the time and amount of the first claim and −αt
E M 3 h1 ðu; t Þ þ σBðt Þ; ye ; b ¼ M3 ðu; y; bÞ þ ðβu þ c1 Þt
∂u
whether the claim causes absolute ruin, we obtain
h  i σ 2 t ∂2 M3 ðu; y; bÞ ∂M3 ðu; y; bÞ
−αt
þ −αyt þ oðt Þ:
M1 ðu; y; bÞ ¼ ð1−λt ÞE M1 u þ c1 t þ σBðt Þ; ye ; b 2 ∂u2 ∂y

h uþc tþσBðtÞ  
ð3:11Þ
−αt
þ λt·E ∫
1
M1 u þ c1 t þ σBðt Þ−x; ye ; b dF ðxÞ
0

uþc1 tþσBðt Þþ
c1  
þ∫
β −αt
M3 u þ c1 t þ σBðt Þ−x; ye ; b dF ðxÞ
Substituting Eq. (3.11) into Eq. (3.10), and then dividing both
uþc1 tþσBðt Þ
sides of Eq. (3.10) by t and letting t → 0, we get Eq. (3.4).
þF ðu þ c1 t þ σBðt Þ þ c1 =β Þ þ oðt Þ: ð3:6Þ
Theorem 3.2. M1(u, y;b), M2(u, y;b) and M3(u, y;b) satisfy
2
By Taylor's expansion, E[B(t)] = 0 and E[B (t)] = t, then we lim M2 ðu; y; bÞ ¼ e
εy=α
; ð3:12Þ
have u→∞

h  i ∂M1 ðu; y; bÞ M3 ð−c1 =β; y; bÞ ¼ 1; ð3:13Þ

E M 1 u þ c1 t þ σBðt Þ; ye−αt ; b ¼ M1 ðu; y; bÞ þ c1 t
∂u 
∂M1 ðu; y; bÞ 
σ 2 t ∂2 M1 ðu; y; bÞ ∂M1 ðu; y; bÞ  ¼ yM 1 ðb; y; bÞ; ð3:14Þ
þ −αyt þ oðt Þ: ð3:7Þ ∂u 
u¼b
2 ∂u2 ∂y
M1 ð0; y; bÞ ¼ M3 ð0; y; bÞ; ð3:15Þ
Substituting Eq. (3.7) into Eq. (3.6), and dividing both sides of
Eq. (3.6) by t and letting t → 0, we can get Eq. (3.2). M1 ðb−; y; bÞ ¼ M2 ðb; y; bÞ: ð3:16Þ
(2) Similarly, when u > b, we obtain
h  i
M 2 ðu; y; bÞ ¼ ð1−λt ÞE M 2 h2 ðu; t Þ þ σBðt Þ; ye−αt ; b Proof.
h
h2 ðu;t ÞþσBðt Þ−b  
αt
þ λt·E ∫ M2 h2 ðu; t Þ þ σBðt Þ−x; ye ; b dF ðxÞ
0 (1) For Eq. (3.12), if u→∞, then Tb =∞, so Du,b =ε/α, i.e. lim M 2
u→∞
h2 ðu;t ÞþσBðt Þ   ðu; y; bÞ ¼ eεy=α .
−αt
þ∫ M 1 h2 ðu; t Þ þ σBðt Þ−x; ye ; b dF ðxÞ
h2 ðu;t ÞþσBðt Þ−b (2) For Eq. (3.13), if u=−c 1/β, the absolute ruin is immediate and no
h2 ðu;t ÞþσBðt Þþ
c1   dividend is paid, so M3(−c1/β, y;b)=1.
−αt
þ∫
β
M 3 h2 ðu; t Þ þ σBðt Þ−x; ye ; b dF ðxÞ
h2 ðu;t ÞþσBðt Þ (3) When the initial surplus is b, we can mimic the derivation of
i Eq. (3.6) to obtain
þF ðh2 ðu; t Þ þ σBðt Þ þ c1 =β Þ þ oðt Þ:
 
ð3:8Þ M1 ðb; y; bÞ ¼ ð1−λt Þec1 t M1 b þ σBðt Þ; ye−αt ; b
h bþc tþσBðtÞ  
−αt
þλt·E ∫
1
M1 b þ c1 t þ σBðt Þ−x; ye ; b dF ðxÞ
By Taylor's expansion, we have 0
c
bþc1 tþσBðt Þþ 1  
−αt
þ∫
β
M 3 b þ c1 t þ σBðt Þ−x; ye ; b dF ðxÞ
bþc1 tþσBðt Þ i
h  i ∂M 2 ðu; y; bÞ þF ðu þ c1 t þ σBðt Þ þ c1 =β Þ þ oðt Þ: ð3:17Þ
E M 2 h2 ðu; t Þ þ σBðt Þ; ye−αt ; b ¼ M 2 ðu; y; bÞþ ðγu þ c2 Þt
∂u
2 2
σ t ∂ M 2 ðu; y; bÞ ∂M 2 ðu; y; bÞ
þ −αyt þ oðt Þ: By similar arguments as that of obtaining Eq. (3.2) from Eq. (3.6),
2 ∂u2 ∂y
ð3:9Þ we have the following equation from Eq. (3.17)

σ ∂ M1 ðu; y; bÞ 
2 2
∂M1 ðu; y; bÞ
 −αy þ ðyc1 −λÞM 1 ðu; y; bÞ
2 ∂u 2  ∂y
u¼b
Plugging Eq. (3.9) into Eq. (3.8), and dividing both sides of Eq. " #
c
(3.8) by t and letting t → 0, we obtain Eq. (3.3). b
¼ −λ ∫ M1 ðb−x; y; bÞdF ðxÞ þ ∫
bþ β1
M3 ðb−x; y; bÞdF ðxÞ þ F ðb þ c1 =βÞ :
0 b
(3) For −c1/β b u b 0, let t0 be the solution to the equation of
h1(u,t) = 0, namely t0 = ln(c1 / (c1 + βu))1/β, which is the time ð3:18Þ
when the surplus returns to the level zero if no claim occurs to
time t0. Furthermore, h1(u, t) b 0 for t b t0 and h1(u, t0) = 0. More- Letting u↑b in Eq. (3.2) and comparing it to Eq. (3.18), we get
over, h1(u, t) is the surplus at time t ≤ t0 if no claim occurs prior to Eq. (3.14).
628 W. Yu / Economic Modelling 31 (2013) 625–634

(4) For −c1/βb ub 0, letting τ0 be the time that the surplus reach Theorem 3.4. Vn1(u;b), Vn2(u;b) and Vn3(u;b) satisfy the following
0 for the first time from ub 0 and using the Markov property of boundary conditions
the surplus process {Ub(t), t≥0}, we have 
′ ðu; bÞu¼b ¼ nV n−1;1 ðb; bÞ; n∈Nþ ;
V n1 ð3:26Þ
h i h i
u yDu;b u yDu;b
M 3 ðu; y; bÞ ¼ E I ðτ0 bT b Þe þ E Iðτ 0 ≥T b Þe
   V n3 ð−c1 =β; bÞ ¼ 0; n∈Nþ ; ð3:27Þ
u T b −τ 0 −αt
¼ E Iðτ 0 bT b Þ exp y∫ e dDðt þ τ 0 Þ þ P ðτ0 ≥T b Þ
0
   V n1 ð0þ; bÞ ¼ V n3 ð0−; bÞ; n∈Nþ ; ð3:28Þ
T b −αt
¼ Eu Iðτ 0 bT b Þ exp ye−ατ0 ∫ e dDðt Þ þ P ðτ 0 ≥T b Þ
τ0

≤M 1 ð0; y; bÞ þ P ðτ 0 ≥T b Þ: V n1 ðb−; bÞ ¼ V n2 ðbþ; bÞ; n∈Nþ ; ð3:29Þ

ð3:19Þ þ
V ″n3 ð−c1 =β; bÞ ¼ 0; n∈N ; ð3:30Þ
Similarly, we have
σ2 σ2
h i h i V ″ ð0þ; bÞ þ c1 V n1
′ ð0þ; bÞ ¼ ′ ð0−; bÞ; n∈Nþ ;
V ″ ð0−; bÞ þ c1 V n3
u
M 3 ðu; y; bÞ ≥ E Iðτ 0 bT b ; τ 0 ¼ t 0 Þe yDu;b
þ E Iðτ0 ≥ T b Þe u yDu;b 2 n1 2 n3
u −ατ0
ð3:31Þ
¼ M 1 ð0; y; bÞE e Iðτ0 bT b ; τ0 ¼ t 0 Þ þ P ðτ 0 ≥ T b Þ
2 2
¼ M1 ð0; y; bÞe
−ατ0
P ðT 1 > t 0 Þ þ P ðτ0 ≥ T b Þ σ σ
V ″ ðb−; bÞ þ c1 V n1
′ ðb−; bÞ ¼ V ″ ðbþ; bÞ
−ðλþα Þt 0
2 n1 2 n2 ð3:32Þ
¼e M 1 ð0; y; bÞ þ P ðτ 0 ≥ T b Þ; þ
þðγb þ c2 ÞV ′n2 ðbþ; bÞ; n∈N ;
ð3:20Þ
n þ
lim V n2 ðu; bÞ ¼ ðε=α Þ ; n∈N : ð3:33Þ
where T1 is the time of the first claim. u→∞

When u↑0, we notice that τ0 and t0 both go into zero.

Letting u↑0 in Eqs. (3.19) and (3.20) and in view of
Proof. The method is similar to Theorem 3.2.
lim P ðτ 0 ≥T b Þ ¼ 0, we obtain Eq. (3.15).
u↑0
(5) For Eq. (3.16), the method is similar to Eq. (3.15), we omit it here. 4. The Gerber–Shiu expected discounted penalty function
The proof of Theorem 3.2 is complete.
Following the same argument as above, we can derive the In this section, we study the Gerber–Shiu expected discounted pen-
integro-differential equations for Vn(u;b). Similarly, Vn(u;b) alty function Ф(u, b), which has different paths for 0 ≤ u ≤ b, u > b and
behaves differently with different initial surplus. Hence, for nota- −c1/β ≤ u ≤ 0. We define
tional convenience, we denote 8
8 < Φ2 ðu; bÞ; u > b;
< V n2 ðu; bÞ; u > b; Φðu; bÞ ¼ Φ1 ðu; bÞ; 0 ≤ u ≤ b; ð4:1Þ
:
V n ðu; bÞ ¼ V n1 ðu; bÞ; 0 ≤ u ≤ b; ð3:21Þ Φ3 ðu; bÞ; −c1 =β b u ≤ 0:
:
V n3 ðu; bÞ; −c1 =β b u b 0;
Then Ф(u;b) satisfies the following integro-differential equations:
with V01(b;b) =1.
Using the representation Theorem 4.1. For 0 ≤ u ≤ b,

X
∞
y
n
σ2
M i ðu; y; bÞ ¼ 1 þ V ni ðu; bÞ; i ¼ 1; 2; 3 ; ð3:22Þ Φ ″ ðu; bÞ þ c1 Φ ′1 ðu; bÞ ¼ ðλ þ α ÞΦ1 ðu; bÞ
n! 2 1" #
n¼1 u uþ
c1 ð4:2Þ
−λ ∫ Φ1 ðu−x; bÞdF ðxÞ þ ∫
β
Φ3 ðu−x; bÞdF ðxÞ þ AðuÞ ;
0 u
and equating the coefficients of yn(n ∈N) in Eqs. (3.2)–(3.4), we
have the following integro-differential equations.
and, for u > b,
Theorem 3.3. For 0 ≤ u ≤ b, σ2
Φ ″ ðu; bÞ þ ðγu þ c2 ÞΦ ′2 ðu; bÞ ¼ ðλ þ α ÞΦ2 ðu; bÞ
2 2h
σ2 −λ ∫
u−b u
Φ2 ðu−x; bÞdF ðxÞ þ ∫ Φ1 ðu−x; bÞdF ðxÞ
′ ðu; bÞ ¼ ðλ þ nα ÞV n1 ðu; bÞ
V ″ ðu; bÞ þ c1 V n1
2 n1 " # ð3:23Þ c1
0 u−b
i
u uþ
c1 uþ
þ∫
β
−λ ∫ V n1 ðu−x; bÞdF ðxÞ þ ∫
β
V n3 ðu−x; bÞdF ðxÞ ; Φ3 ðu−x; bÞdF ðxÞ þ AðuÞ ;
0 u u

ð4:3Þ
and, for u > b,
and, for − c1/β ≤ u ≤ 0,
2
σ
V ″ ðu; bÞ þ ðγu þ c2 ÞV n2
′ ðu; bÞ ¼ ðλ þ nα ÞV n2 ðu; bÞ σ2
2 n2" # Φ ″ ðu; bÞ þ ðβu þ c1 ÞΦ 3′ ðu; bÞ ¼ ðλ þ α ÞΦ3 ðu; bÞ
c
uþ 1 2 3" #
−λ ∫
u−b
V n2 ðu−x; bÞdF ðxÞ þ ∫
u
V n1 ðu−x; bÞdF ðxÞ þ ∫
β
V n3 ðu−x; bÞdF ðxÞ ; uþ
c1 ð4:4Þ
−λ ∫
0 u−b u β
Φ3 ðu−x; bÞdF ðxÞ þ AðuÞ ;
0
ð3:24Þ
and, for − c1/β ≤ u ≤ 0,
with boundary conditions
2
σ
c
uþ 1
′ ðu; bÞ ¼ ðλ þ nα ÞV n3 ðu; bÞ−λ∫ β V n3 ðu−x; bÞdF ðxÞ:
V ″ ðu; bÞ þ ðβu þ c1 ÞV n3
2 n3 0 lim Φ2 ðu; bÞ ¼ Φ2 ðuÞ; ð4:5Þ
b→∞
ð3:25Þ

Proof. The method is similar to Theorem 3.1. Φ1 ð0þ; bÞ ¼ Φ3 ð0−; bÞ; ð4:6Þ
 W. Yu / Economic Modelling 31 (2013) 625–634 629

Φ1 ðb−; bÞ ¼ Φ2 ðbþ; bÞ; ð4:7Þ Since

uh y i
σ2 σ2 ∫0 ∫0 Φ1 ðv; bÞðλ þ α−λF ðy−vÞÞdv dy
Φ ″ðb−; bÞ þ c1 Φ 1′ ðb−; bÞ ¼ Φ ″ ðbþ; bÞ þ ðγb þ c2 ÞΦ ′2 ðbþ; bÞ; ð4:15Þ
2 1 2 2 uh u i
ð4:8Þ ¼ ∫ ∫ Φ1 ðv; bÞðλ þ α−λF ðy−vÞÞdy dv:
0 v

2 2
σ σ Substituting Eq. (4.15) into Eq. (4.14) yields Eq. (4.10).
Φ ″ ð0þ; bÞ þ c1 Φ1′ ð0þ; bÞ ¼ Φ ″ ð0−; bÞ þ c1 Φ 3′ ð0−; bÞ; ð4:9Þ
2 1 2 3 Similar to the proof of Eq. (4.10), we can obtain Eq. (4.11) and
Eq. (4.12).
∞
where AðuÞ ¼ ∫ ωðu; x−uÞdF ðxÞ, Ф2(u) is the Gerber–Shiu expected
uþcβ1 Remark. It is well known, L1(u), L2(u) and L3(u) are absolutely integra-
discounted penalty function. ble, and l1(u, b), l2(u, b) and l3(u, b) are all continuous. Then Ф1(u;b),
Ф2(u;b) and Ф3(u;b) can be approximated recursively by Picard's
Proof. The method is similar to Theorem 3.1. sequence, i.e.

Theorem 4.2. The integro-differential Eqs. (4.2)–(4.4) can be expressed X

∞
u
by Volterra equations Φ1 ðu; bÞ ¼ L1 ðuÞ þ ∫0 l1n ðu; yÞL1 ðyÞdy; 0 ≤ u ≤ b;
n¼1
u
Φ1 ðu; bÞ ¼ ∫ l1 ðu; vÞΦ1 ðv; bÞdv þ L1 ðuÞ; 0 ≤ u ≤ b; ð4:10Þ u
where, l11(u, y)=l1(u, y), l1n(u,y)=∫y l1(u,x)l1,n−1(x,y)dx, n=2, 3 …
0

u X
∞
u
Φ2 ðu; bÞ ¼ ∫ l2 ðu; vÞΦ2 ðv; bÞdv þ L2 ðuÞ; u > b; ð4:11Þ Φ2 ðu; bÞ ¼ L2 ðuÞ þ ∫b l2n ðu; yÞL2 ðyÞdy; u > b;
b
n¼1
u
Φ3 ðu; bÞ ¼ ∫ c l ðu; vÞΦ3 ðv; bÞdv þ L3 ðuÞ; −c1 =β ≤ u ≤ 0; ð4:12Þ u
− 1 3
β where, l21(u, y)=l2(u, y), l2n(u,y)=∫ l2(u,x)l2,n−1(x,y)dx, n=2, 3, …
y

where X
∞
u
Φ3 ðu; bÞ ¼ L3 ðuÞ þ ∫−c l3n ðu; yÞL3 ðyÞdy; −c1 =β ≤ u ≤ 0;
1 =β
2 h u i n¼1
l1 ðu; vÞ ¼ 2 −c1 þ ðλ þ α þ γ Þðu−vÞ−λ∫ F ðy−vÞdy ;
σ" !
v
#
u
2 2
where, l31(u, y)=l3(u, y), l3n(u,y)=∫y l3(u,x)l3,n−1(x,y)dx, n=2, 3, ....
2 σ uσ u
L1 ðuÞ ¼ 2 þ c1 u Φ1 ð0; bÞ þ Φ1′ ð0; bÞ−λ∫ W 1 ðyÞdy ; Therefore, at least in principle, if we can find Ф1(0;b), Ф1′(0;b),
σ 2 2 0
Ф2(b;b), Ф2′(b;b), Ф3(−c1/β;b) and Ф3′(−c1/β;b), we can get the
0 y
W 1 ðyÞ ¼ ∫ c Φ ðv; bÞðF ðy−vÞ−F ð−vÞÞdv þ ∫ AðvÞdv exact form of the solutions for Ф1(u;b), Ф2(u;b) and Ф3(u;b), and
− β1 3 0
can approximate Ф1(u;b), Ф2(u;b) and Ф3(u;b), recursively.
2 h u i
l2 ðu; vÞ ¼ −ðγb þ c2 Þ þ ðλ þ α Þðu−vÞ−λ∫ F ðy−vÞdy ;
σ2 v Example 4.1. (The Laplace transform of absolute ruin time) We
  discuss a particular case of Ф(u, b) by setting ω(x, y) = 1 for all
2 u
L2 ðuÞ ¼ 1− 2 ðu−bÞðγb þ c2 Þ Φ2 ðb; bÞ þ ðu−bÞΦ′2 ðb; bÞ−λ∫ x > −c1/β, y > c1/β. Denote
σ b

h  i
−αT b 
W 2 ðyÞdy; φðu; bÞ ¼ E e U b ð0Þ ¼ u ;
b
W 2 ðyÞ ¼ ∫ Φ1 ðv; bÞðF ðy−vÞ−F ðb−vÞÞdv
0 which is the expected present value of a payment 1 at the time of
0 y ruin, and at the same time, the Laplace transform of absolute ruin
þ∫ c Φ ðv; bÞðF ðy−vÞ−F ðb−vÞÞdv þ ∫ AðvÞdv;
− β1 3 b time Tb. It is easy to see that the sample path of the φ(u;b) behaves
2 h u i differently with different initial surplus. Hence, for notational conve-
l3 ðu; vÞ ¼ 2 −ðc1 þ βvÞ þ ðλ þ β þ α Þðu−vÞ−λ∫ F ðy−vÞdy ;
σ v nience, we set
2λ u v 8
L3 ðuÞ ¼ Φ3 ð−c1 =β; bÞ þ Φ ′3 ð−c1 =β; bÞðu þ c1 =βÞ− 2 ∫ c1 ∫ c1 AðyÞdydv: < φ2 ðu; bÞ; u > b;
σ − − β β
φðu; bÞ ¼ φ1 ðu; bÞ; 0 ≤ u ≤ b; ð4:16Þ
:
φ3 ðu; bÞ; −c1 =β b u ≤ 0:
Proof. In Eq. (4.2), substituting u with v and integrating Eq. (4.2)
over (0, u) yields By similar derivation to Theorem 3.1, φ1(u;b), φ2(u;b) and φ3(u;b)
satisfy the following second-order integro-differential equations:
σ
2
σ
2 For 0 ≤ u ≤ b,
Φ ′ ðu; bÞ þ c1 Φ1 ðu; bÞ ¼ Φ ′ ð0; bÞ þ c1 Φ1 ð0; bÞ
2 1 2 1
σ2
u
ð4:13Þ φ ″ ðu; bÞ þ c1 φ 1′ ðu; bÞ ¼ ðλ þ α Þφ1 ðu; bÞ
þ∫0 Φ1 ðv; bÞðλ þ α−λF ðu−vÞÞdv 2 1" #
u uþ
c1
u
−λ ∫ φ1 ðu−x; bÞdF ðxÞ þ ∫
β
0
−λ∫−c1 Φ3 ðv; bÞðF ðu−vÞ−F ð−vÞÞdv−λ∫ AðvÞdv: φ3 ðu−x; bÞdF ðxÞ þ F ðu þ c1 =βÞ ;
β 0 0 u

ð4:17Þ
In Eq. (4.13), substituting u with y and integrating Eq. (4.13) over
(0, u) yields and, for u > b,
" #
σ2 σ2 σ2 σ2
φ ″ ðu; bÞ þ ðγu þ c2 Þφ 2′ ðu; bÞ ¼ ðλ þ α Þφ2 ðu; bÞ
u
Φ1 ðu; bÞ ¼ Φ1 ð0; bÞ−c1 ∫ Φ1 ðy; bÞdy þ Φ ′1 ð0; bÞ þ c1 Φ1 ð0; bÞ u
2 2 0 2 2 2h
u−b u
u h y i u −λ ∫ φ2 ðu−x; bÞdF ðxÞ þ ∫ φ2 ðu−x; bÞdF ðxÞ ð4:18Þ
0 u−b
þ∫ ∫ Φ1 ðv; bÞðλ þ α−λF ðy−vÞÞdv dy−λ∫ W 1 ðyÞdy:
0 0 0 uþ
c1 i
þ∫
β

ð4:14Þ φ3 ðu−x; bÞdF ðxÞ þ F ðu þ c1 =βÞ ;

u
630 W. Yu / Economic Modelling 31 (2013) 625–634

and, for −c1/β ≤ u ≤ 0, φ1 ðb−; bÞ ¼ φ2 ðbþ; bÞ; ð4:22Þ

2
σ σ2 σ2
φ ″ ðu; bÞ þ ðβu þ c1 Þφ ′3 ðu; bÞ ¼ ðλ þ α Þφ3 ðu; bÞ φ ″ ðb−; bÞ þ c1 φ 1′ ðb−; bÞ ¼ φ ″ ðbþ; bÞ þ ðγb þ c2 Þφ ′2 ðbþ; bÞ; ð4:23Þ
2 3" # 2 1 2 2
uþ
c1 ð4:19Þ
−λ ∫
β
φ3 ðu−x; bÞdF ðxÞ þ F ðu þ c1 =βÞ ;
0 σ2 σ2
φ ″1 ð0þ; bÞ þ c1 φ ′1 ð0þ; bÞ ¼ φ ″ ð0−; bÞ þ c1 φ ′3 ð0−; bÞ; ð4:24Þ
2 2 3
with boundary conditions
φ3 ð−c1 =β; bÞ ¼ 1; ð4:25Þ
lim φ2 ðu; bÞ ¼ 0; ð4:20Þ
u→∞

″ 2α
φ1 ð0þ; bÞ ¼ φ3 ð0−; bÞ; ð4:21Þ φ 3 ð−c1 =β þ 0; bÞ ¼ : ð4:26Þ
σ2

5. Explicit expressions to Vn(u, b) for exponential claims when α = 0

In this section, we derive the explicit expressions of Vn(u, b) in the case of α = 0. We assume that F(x) = 1 − e −x/μ, x > 0, μ > 0, namely, the
claim size distribution F is an exponential distribution with mean μ.
In view of Eqs. (3.23)–(3.25) and the exponential density function, we obtain

 
σ2 λ u u 0 x
′ ðu; bÞ ¼ λV n1 ðu; bÞ− e− ∫ V n1 ðx; bÞe dx þ ∫ c V n3 ðx; bÞe dx ;
x
″ ðu; bÞ þ c1 Vn1
V n1 μ μ μ
ð5:1Þ
2 μ 0 − 1

for 0 ≤ u ≤ b, and

2  
σ λ u u b x 0
′ ðu; bÞ ¼ λV n2 ðu; bÞ− e− ∫ V n2 ðx; bÞe dx þ ∫ V n1 ðx; bÞe dx þ ∫ c V n3 ðx; bÞe dx ;
x xx
″ ðu; bÞ þ ðγu þ c2 ÞV n2
V n2 μ μ μ μ
ð5:2Þ
2 μ b 0 − β
1

for u > b, and for −c1/β ≤ u ≤ 0,

σ2 λ u u
′ ðu; bÞ ¼ λV n3 ðu; bÞ− e−μ ∫ c1 V n3 ðx; bÞeμ dx:
x
V ″ ðu; bÞ þ ðβu þ c1 ÞV n3 ð5:3Þ
2 n3 μ −β

 
d 1
Applying the operator þ on Eqs. (5.1)–(5.3), respectively, and then rearranging, we have
du μ

2μc1 þ σ 2 2ðc1 −λμ Þ

″′ ðu; bÞ þ
V n1 ″ ðu; bÞ þ
V n1 ′ ðu; bÞ ¼ 0;
V n1 ð5:4Þ
μσ 2 μσ 2

for 0 ≤ u ≤ b, and
!  
σ 2 000 σ2 ″ γu þ c2 ′
V ðu; bÞ þ γu þ c2 þ V n2 ðu; bÞ þ γ−λ þ Vn2 ðu; bÞ ¼ 0; ð5:5Þ
2 n2 2μ μ

for u > b, and for −c1/β ≤ u ≤ 0,

!  
σ2 σ2 βu þ c1
V ″′ ðu; bÞ þ βu þ c1 þ ″ ðu; bÞ þ β−λ þ
V n3 ′ ðu; bÞ ¼ 0:
Vn3 ð5:6Þ
2 n3 2μ μ

It is obvious that the general solution to Eq. (5.4) is

V n1 ðu; bÞ ¼ ξn1 eδ1 u þ ξn2 eδ2 u þ ξn3 ; 0 ≤ u ≤ b; ð5:7Þ

where ξn1, ξn2 and ξn3 are arbitrary constants, δ1 and δ2 are the two real roots of the following equation

2
δ þ ρδ þ η ¼ 0; ð5:8Þ

with ρ = (2μc1 + σ 2) / μσ 2, η = 2(c1 − λμ) / μσ 2 satisfying ρ 2 − 4η > 0, i.e.

qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
−ρ þ ρ2 −4ρη −ρ− ρ2 −4ρη ð5:9Þ
δ1 ¼ ; δ2 ¼ :
2 2
 W. Yu / Economic Modelling 31 (2013) 625–634 631

For Eq. (5.5), let u = z − Δ1, Δ1 = c2 /γ − σ 2 / (2μγ) and Vn2′(u, b) = e−z/μm(z). For Eq. (5.6), let u = z − Δ2, Δ2 = c1 / β− σ2 / (2μβ) and Vn3′(u, b) =
e −z/βm(z), then Eqs. (5.5) and (5.6) are changed to

σ2
m ″ðzÞ þ γzm ′ðzÞ þ ðγ−λÞmðzÞ ¼ 0; ð5:10Þ
2

σ2
m ″ðzÞ þ βzm ′ðzÞ þ ðβ−λÞmðzÞ ¼ 0: ð5:11Þ
2

Further, let z 2 = −σ 2x / γ in Eq. (5.10), z 2 = −σ 2x / β in Eq. (5.11) and m(z) = H(x). Then Eqs. (5.10) and (5.11) are converted to the following
Kummer's confluent hypergeometric equations

   
1 1 λ
xH ″ðxÞ þ −x H ′ðxÞ− − H ðxÞ ¼ 0; ð5:12Þ
2 2 2γ

   
1 1 λ
xH ″ðxÞ þ −x H ′ðxÞ− − HðxÞ ¼ 0: ð5:13Þ
2 2 2β

Then by the method of Slater (1960), we get

′ ðu; bÞ ¼ kn1 g 1 ðuÞ þ kn2 g 2 ðuÞ;

V n2 u > b; ð5:14Þ

′ ðu; bÞ ¼ kn3 q1 ðuÞ þ kn4 q2 ðuÞ;

V n3 −c1 =β b u ≤ 0; ð5:15Þ

where kn1, kn2, kn3 and kn4 are constants and

( ) !
u γðu þ Δ1 Þ2 λ 1 γ ðu þ Δ1 Þ2
g 1 ðuÞ ¼ exp − − U ; ; ;
μ σ2 2γ 2 σ2
( ) !
2 2
u γðu þ Δ1 Þ 1 λ 3 γ ðu þ Δ1 Þ
g 2 ðuÞ ¼ ðu þ Δ1 Þ exp − − D þ ; ; ;
μ σ2 2 2γ 2 σ2
( ) !
2 2
u βðu þ Δ2 Þ λ 1 βðu þ Δ2 Þ
q1 ðuÞ ¼ exp − − U ; ; ;
μ σ2 2β 2 σ2
( ) !
2 2
u βðu þ Δ2 Þ 1 λ 3 βðu þ Δ2 Þ
q2 ðuÞ ¼ ðu þ Δ2 Þ exp − − D þ ; ; ;
μ σ2 2 2β 2 σ2

and D(l, m;x) and U(l, m;x) are the confluent hypergeometric functions of the first and second kinds, respectively.
Hence, by Eqs. (3.27) and (3.33), we have

∞  ε n ∞ ∞  ε n  ε n
′ ðy; bÞdy þ
V n2 ðu; bÞ ¼ −∫ V n2 ¼ −kn1 ∫ g 1 ðyÞdy−kn2 ∫ g 2 ðyÞdy þ ¼ −kn1 G1 ðuÞ−kn2 G2 ðuÞ þ ; u≥b;
u α u u α α
ð5:16Þ
u u u
V n3 ðu; bÞ ¼ ∫ ′ ðy; bÞdy ¼ k3 ∫
V n3 c q ðyÞdy þ k4 ∫ c1 q2 ðyÞdy ¼ kn3 Q 1 ðuÞ þ kn4 Q 2 ðuÞ; −c1 =β ≤ u ≤ 0; ð5:17Þ
− β1 1
c
− β1 − β

∞ u
where Gi(u) = ∫u gi(y)dy, i = 1, 2, Q j ðuÞ ¼ ∫ q ðyÞdy, j = 1, 2.
−cβ1 j
Now, we determine the coefficients ξn1, ξn2, ξn3, kn1, kn2, kn3, kn4 by the boundary conditions Eqs. (3.26)–(3.32), Eq. (5.1) and V01(b, b) = 1.
Using the formulas of

d l d
Dðl; m; xÞ ¼ Dðl þ 1; m þ 1; xÞ and U ðl; m; xÞ ¼ −lDðl þ 1; m þ 1; xÞ;
dx m dx
632 W. Yu / Economic Modelling 31 (2013) 625–634

we obtain the following equations

8
>
>
> ξn1 δ1 eδ1 b þ ξn2 δ2 eδ2 b ¼ ρn ;
>
>
>
> kn3 Q 1″ð−c1 =βÞ þ kn4 Q ″2 ð−c1 =βÞ ¼ 0;
>
>
>
>
>
> ξn1 þ ξn2 þ ξn3 ¼ kn3 Q 1 ð0Þ þ kn4 Q 2 ð0Þ;
>
>
>
>
> ξn1 eδ1 b þ ξn2 eδ2 b þ ξn3 ¼ −kn1 G1 ðbÞ−kn1 G2 ðbÞ þ τ n ;
>
>
>
>
> σ2  
>
> 2 2 σ2

>
>
< 2 ξ n1 δ1 þ ξ n2 δ2 þ c 1 ðξ n1 δ1 þ ξn2 δ2 Þ ¼ k Q ″ ð0Þ þ kn4 Q ″2 ð0Þ

2 n3 1
þ c1 kn3 Q 1′ ð0Þ þ kn4 Q 2′ ð0Þ ; ð5:18Þ
>
> 2    σ2
>
> σ

>
> 2 δ b 2 δ b δ b
ξn1 δ1 e 1 þ ξn2 δ2 e 2 þ c1 ξn1 δ1 e 1 þ ξn2 δ2 e 2 ¼
δ b
−kn1 G ″1 ðbÞ−kn2 G ″2 ðbÞ
>
>
>
> 2
2
>
> þ ðγb þ c2 Þ −kn1 G1′ ðbÞ−kn2 G ′2 ðbÞ ;
>
>
>
>  
>σ
>
2
>
>
2 2
ξn1 δ1 þ ξn2 δ2 þ c1 ðξn1 δ1 þ ξn2 δ2 Þ ¼ λ½ξn1 þ ξn2 þ ξn3 
>
>
>
> 2
>
> λ 0 λ 0
>
x x
: −kn3 ∫−c1 Q 1 ðxÞe dx−kn4 ∫−c Q 2 ðxÞe dx:
μ
1
μ

μ β μ β

Let

δ b δ b
a1 ¼ δ1 e 1 ; a2 ¼ δ2 e 2 ; a3 ¼ Q ″1 ð−c1 =βÞ; a4 ¼ Q ″2 ð−c1 =βÞ; a5 ¼ Q 1 ð0Þ; a6 ¼ Q 2 ð0Þ;
2 2 2 2
δ1 σ δ σ
a7 ¼ eδ1 b ; a8 ¼ eδ2 b ; a9 ¼ G1 ðbÞ; a10 ¼ G2 ðbÞ; a11 ¼ þ c1 δ1 ; a12 ¼ 2 þ c1 δ2 ;
2 2
2 2
σ σ 1 2 2 δ1 b δ b
a13 ¼ ″ ′
Q ð0Þ þ c1 Q 1 ð0Þ; a14 ¼ ″ ′
Q ð0Þ þ c1 Q 2 ð0Þ; a15 ¼ σ δ1 e þ c1 δ1 e 1 ;
2 1 2 2 2
2
1 2 2 δb δ b σ
a16 ¼ σ δ2 e 2 þ c1 δ2 e 2 ; a17 ¼ G ″ ðbÞ þ ðγb þ c2 ÞG1′ ðbÞ;
2 2 1
σ2 1 2 2 1 2 2
a18 ¼ G ″ ðbÞ þ ðγb þ c2 ÞG2′ ðbÞ; a19 ¼ σ δ1 þ c1 δ1 −λ; a20 ¼ σ δ2 þ c1 δ2 −λ;
2 2 2 2
λ 0 x λ 0 x
a21 ¼ λ; a22 ¼ ∫c Q 1 ðxÞe dx; a23 ¼ ∫ c Q 2 ðxÞe dx;
μ μ

μ β
1
μ − 1
β

a1 a a ρ
A1 ¼ 1−a7 − ð1−a8 Þ; A2 ¼ ða5 þ a9 Þ; A3 ¼ 3 6 ; A4 ¼ −τn − n ð1−a8 Þ;
a2 a4 a2
a1 a3
A5 ¼ a19 þ a21 − ða20 þ a21 Þ; A6 ¼ a5 a21 ; A7 ¼ a22 − ða23 −a6 a21 Þ;
a2 a4
ρn a1 a21 a3 a14 a
A8 ¼ − ða20 þ a21 Þ; A9 ¼ a11 − ; A10 ¼ −a13 ; A11 ¼ − 12 ρn ;
a2 a2 a4 a2
a1 a16 a16 n
A12 ¼ a15 − ; A13 ¼ − ρ ; ρ ¼ nV n−1;1 ðb; bÞ; τ n ¼ ðε=α Þ :
a2 a2 n n

Then the solutions of Eq. (5.18) are

a18 ½A2 ðA8 A9 −A5 A11 Þ−A6 ðA4 A9 −A1 A11 Þ−a10 ½A6 ðA9 A13 −A11 A12 Þ þ a17 ðA8 A9 −A5 A11 Þ
kn3 ¼
a18 ½A2 ðA7 A9 −A5 A10 Þ−A6 ðA3 A9 −A1 A10 Þ−a10 ½A17 ðA7 A9 −A5 A10 Þ−A6 A10 A12 
1 A2 ðA8 A9 −A5 A11 Þ−A6 ðA4 A9 −A1 A11 Þ
kn2 ¼
a10 A 6 A9
1 A2 ðA7 A9 −A5 A10 Þ−A6 ðA3 A9 −A1 A10 Þ
− kn3 ;
a10 A6 A9
a3
kn4 ¼ − k ;
a4 n3
A8 A9 −A5 A11 A7 A9 −A5 A10
kn1 ¼ − þ kn3 ;
A6 A9 A6 A9
A11 A10
ξn1 ¼ − k ;
A9 A9 n3
 
ρ a A A
ξn3 ¼ n − 1 11 − 10 kn3 ;
a2 a2 A9 A9
     
A A −A5 A10 A A −A5 A11 a A A
ξn3 ¼ a5 7 9 kn3 − 8 9 −a6 3 kn3 − 11 − 10 kn3 ;
A6 A9 A6 A9 a4 A9 A9
 
ρ a A A
− n þ 1 11 − 10 kn3 :
a2 a2 A9 A9
 W. Yu / Economic Modelling 31 (2013) 625–634 633

Note that V0,1(b;b) = 1, setting n = 1 in Eq. (5.18), then ρ1 = 1 and τ1 = ε/α, so ξ11, ξ12, ξ13, k11, k12, k13, and k14 are determined and we obtain
the explicit expressions of V11(u;b), V12(u;b) and V13(u;b). Let n = 2 and in view of the V11(b;b), we have ρ2 = 2 V11(b;b) and τ 2 = ε 2 / α 2.
Substituting ρ2 and τ2 into Eq. (5.18), then ξ21, ξ22, ξ23, k21, k22, k23, and k24 are determined and we get the explicit expressions of V21(u;b),
V22(u;b) and V23(u;b). Repeating the above steps, we can obtain the explicit expressions of Vn1(u;b), Vn2(u;b) and Vn3(u;b).

6. Numerical analysis to V1(u, b) for exponential claims for 0 ≤ u ≤ b, and

!  
In this section, we will illustrate some results numerically in the case 2 σ
2
2 γu þ c2
V ″′
12 ðu; bÞ þ γu þ c2 þ ″ ðu; bÞ þ
V 12 γ−λ−α þ ′ ðu; bÞ
V 12
of α >0. We assume that the claim size distribution is an exponential σ2 2μ σ 2 μ
ð6:2Þ
distribution with mean μ > 0. We will give the numerical simulation of 2α
− V 12 ðu; bÞ ¼ 0;
V1(u;b) through Matlab. Substituting F(x) = 1 − e−x/μ into Eqs. μσ 2
 
d 1
(3.23)–(3.25) for the case n = 1, and applying operator þ to
du μ
for u > b, and for −c1/β≤ u ≤ 0,
them, we have
!  
2 σ2 2 βu þ c2
V ″′
13 ðu; bÞ þ βu þ c1 þ ″ ðu; bÞ þ
V13 β−λ−α þ ′ ðu; bÞ
V13
2μc1 þ σ
2
2ðc1 −λμ−αμ Þ 2α σ2 2μ σ 2 μ
″′ ðu; bÞ þ
V 11 ″ ðu; bÞ þ
V 11 ′ ðu; bÞ−
V 11 V 11 ðu; bÞ ¼ 0; ð6:3Þ
μσ 2 μσ 2 μσ 2 2α
− V 13 ðu; bÞ ¼ 0;
ð6:1Þ μσ 2

with boundary conditions (3.26)–(3.33).

40 Suppose μ = 1, σ = 1.5, α = 0.01, λ = 1, c1 = 1.5, c2 = 1, γ = 0.06,
β = 0.08 and b = 10. Then Fig. 1 shows the curves of V1(u;10). From
35 Fig. 1, we find that the influence of investment is very large. This is
because investment income makes the company earnings increase
30 rapidly. Figs. 2–5 present the impact of threshold b, dividend rate ε,
investment rate γ and debit rate β on V1(u;b). Figs. 2 and 5 show
25 the higher threshold b or debit rate β results in the less expected
discounted dividend payments. Figs. 3 and 4 show that the higher
V1(u,b)

20 dividend rate ε or investment rate γ results in the higher expected

discounted dividend payments.
15
Acknowledgements
10
The author thanks the two anonymous referees for the thoughtful
5 comments and suggestions that greatly improved the presentation
of this paper. This work was supported by the National Natural
0 Science Foundation of China (No. 11171187, No. 10921101), the Natu-
−20 0 20 40 60 80 100 ral Science Foundation of Shandong Province (No. ZR2012AQ013, No.
u
ZR2010GL013) and the Humanities and Social Sciences Project of the
Fig. 1. The curves of V1(u;b). Ministry Education of China (No. 10YJC630092, No. 09YJC910004).

Fig. 2. The effect of b on V1(u;b). Fig. 3. The effect of ε on V1(u;b).

634 W. Yu / Economic Modelling 31 (2013) 625–634

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Fig. 5. The effect of β on V1(u;b).