Evaluating Liquidation Strategies for Insurance Companies

In this paper, we examine liquidation strategies and asset allocation decisions for property and casualty insurance companies for different insurance product lines. We propose a cash-flow based liquidation model of an insurance company and analyze selling strategies for a portfolio with liquid and illiquid assets. Within this framework, we study the influence of different bid-ask spread models on the minimum capital requirement and determine a solution set consisting of an initial asset allocation and a liquidation strategy. We show that the initial asset allocation, in conjunctino with the appropriate liquidation strategy, is an important tool in minimizing the capital committed to cover claims for a predetermined ruin probability. This interdependence is of importance to insurance companies, stakeholders and regulators.