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Title: Laplace transform of the time of ruin in a risk model with stochastic return on investments

Article Type: Article

Corresponding Author: Mr Moncef Elghribi, Ph.D.

Corresponding Author's Institution:

First Author: Moncef Elghribi, Ph.D.

Order of Authors: Moncef Elghribi, Ph.D.

Abstract: In this paper, we consider a perturbed risk model with stochastic
return on investments. The basic risk process is the Sparre-Andersen
model perturbed by di
usion with the stochastic return on investments
generating process is a compound renewal process plus a Brownian
motion with positive drift. For this risk process, we derive a general
integro-di
erential equation for the Laplace transform of the time of
ruin with positive surplus initial via the elementary properties of the
classical conditional expectation. The special cases, for a di
erent inter-
arrival times distributions, are given in some details.




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Laplace transform of the time of ruin in a risk
model with stochastic return on investments
Moncef Elghribi

and Ezeddine Haouala

Abstract
In this paper, we consider a perturbed risk model with stochastic
return on investments. The basic risk process is the Sparre-Andersen
model perturbed by diusion with the stochastic return on investments
generating process is a compound renewal process plus a Brownian
motion with positive drift. For this risk process, we derive a general
integro-dierential equation for the Laplace transform of the time of
ruin with positive surplus initial via the elementary properties of the
classical conditional expectation. The special cases, for a dierent inter-
arrival times distributions, are given in some details.
Key words: Ruin theory; Risk process; Laplace transform; Stochastic return; Integro-
dierential equation.
2000 Mathematics Subject Classication : 60K10, 60G51, 60J35, 60J55 and
60J60.
1 Introduction
In the past decade, the continous-time risk process with stochastic interest have been
studied by many authors, such as Paulsen [7, 8], Paulsen and Gjessing [9, 10], Wang
and Wu [13, 14], Kalashnikov and Norberg [6], Cai [1], Yuen et al. [17, 18], Yuen and
Wang [16] and the references therein. In their risk models, it is often assumed that the
business of an insurer follows a Levy process. As an alternative, the renewal process has
recently received a fair amount of attention in modeling claim counts. In view of this,
it is natural to extend the study of ruin problems with stochastic return to the renewal
risk process. In the Cramer-Lundberg model perturbed by diusion with stochastic
return on investments, many authors for example Wang and Wu (2001) and Yuen et al.
(2004) derive an integral equation and an integro-dierential for the penalty function
and the ultimate ruin probability, via Yors approach (1992); [15] for some exponential
functionals of Brownian motion. Now, in the Sparre-Andersen model perturbed by
diusion with stochastic return on investments, via the elementary properties of the
classical conditional expectation and considerating the ordinary dierential equation
of a common density function of the inter-arrival times due to the insurance business

Departement de Mathematiques, Faculte des Sciences de Tunis, 2092 Tunis, Tunisia. Fax: +216-
71-885-350. E-mail address: elghribimoncef@yahoo.fr

Departement de Mathematiques, Faculte des Sciences de Tunis, 2092 Tunis, Tunisia. Fax: +216-
71-885-350. E-mail address: ezdine.haouala@fst.rnu.tn
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process and those caused by oscillations due to the stochastic return process on invest-
ments, and following the steps in Paulsen and Gjessing (1997); [9], we derive a general
integro-dierential equation for the Laplace transform of the time of ruin with positive
surplus initial. Some examples of the above equation, for a dierent inter-arrival times
distributions, are listed in some details.
The purpose of this work is to present some results on the Laplace transform of
the time of ruin. In next Section, we consider a simplied version of the model used in
Paulsen and Gjessing (1997) and we substitute, in same time, the compound Poisson
process in the surplus of an insurance business and in the stochastic process return
on investments by a compound renewal process. The innitesimal generator of the
above risk model is computed and our attention is concentrated on the two quantities:
probabilities distributions functions of all components of the above risk model and
the Laplace transform of the time of ruin. In section 3, for the above risk process
with stochastic return on investments, we derive an integro-dierential equation for the
Laplace transform of the time of ruin with positive surplus initial via the elementary
properties of the classical conditional expectation. The special cases, for a dierent
inter-arrival times distributions, are given in some details.
2 Denitions and ruin theory
We will assume that all processes and random variables are dened on a ltered
complete probability space (, F, P, (F
t
)
t 0
). The ltration (F
t
)
t 0
is right continuous
and all the stochastic processes to be dened in this paper are adapted.
The basic process is the surplus generating process
P(t) = u +ct +W(t)
N(t)

k=1
X
k
, t 0, (2.1)
where u 0 is the initial capital and c > 0 is the incoming premium rate. The claim
sizes (X
k
)
kN
are positive, independent, and identically distributed (i.i.d.) random
variables with common probability distribution function F
X
, with F
X
(0) = 0 and
density function f
X
, representing the kth claim amount, with nite mean = E[X
1
],
and variance
2
= V ar(X
1
) < . The ordinary renewal process {N(t) : t 0} denotes
the number of claims up to time t such that N(t) = sup{n 1 : T
n
t}, t 0,
with by convention, sup = 0, where the (T
n
)
nN
denotes the claim times such that
T
0
= 0 < T
1
< T
2
< ... The inter-arrival times:
1
= T
1
,
k
= T
k
T
k1
, k 2 are
i.i.d. with common density function f

and with nite mean. Finally, {W(t) : t 0}

is a standard Brownian motion, that is independent of the compound ordinary renewal
process S(t) =

N(t)
k=1
X
k
and > 0 is a dispersion parameter. Further, we shall
assume that the sequences X
k
and
k
are independent of each other. In the literature
{P(t) : t 0} is called a classical risk process perturbed by diusion, see e.g. Furrer
and Schmidli (1994); [5].
Next, we consider the stochastic return on investments generating process
I(t) = at +B(t) +
M(t)

k=1
Y
k
, t 0, (2.2)
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where a and are positive constants, a stands for the xed interest rate. (Y
k
)
kN

are positive i.i.d. random variables with common probability distribution function
F
Y
, with F
Y
(1) = 0 and density function f
Y
, such that (Y
k
)
kN
can be used to
represent the change in the asset price or to reect the change in interest in some way.
Note that if a risky asset is invested, such an asset may bear negative interest, that
is P[Y
k
< 0] > 0. {M(t), t 0} is an another ordinary renewal process which denotes
the number of jumps up to time t such that M(t) = sup{n 1 : T

n
t}, t 0,
with by convention, sup = 0, where the (T

n
)
nN
denotes the jump times such that
T

0
= 0 < T

1
< T

2
< ... The inter-arrival times:

1
= T

1
,

k
= T

k
T

k1
, k 2
are i.i.d. with common density function f

and with nite mean. We note that, the

compound renewal process S

(t) =

M(t)
k=1
Y
k
may be interpreted as the total amount of
large stochastic additional changes in the return on investments up to time t. Finally,
{B(t) : t 0} is another standard Brownian motion and independent of the compound
ordinary renewal process S

(t) =

M(t)
k=1
Y
k
, stands for the uncertainly associated with
the return on investments. Further, we shall assume that the sequences Y
k
and

k
are
independent of each other.
It is assumed that the processes {P(t) : t 0} and {I(t) : t 0} are independent,
implying that they almost surely have no common jumps.
The risk process with stochastic return on investments associated with (2.1) and
(2.2) is then the solution for the following linear stochastic dierential equation
R(t) = P(t) +
_
t
0
R(s

)d I(s), t 0. (2.3)
By Theorem 52 of Protter (1992, p. 266) [11], the solution for the above equation (2.3)
is
R(t) = U(t)
_
u +
_
t
0
1
U(s

)
d P(s)
_
, t 0, (2.4)
where
U(t) = exp
_
(a
1
2

2
)t +B(t)
_M(t)

k=1
(1 +Y
k
), t 0.
Furthermore, since both {P(t) : t 0} and {I(t) : t 0} have stationary independent
increments, it follows by Protter (1992); [11] Theorem 32 p. 238 that {R(t) : t 0} is
a homogeneous strong Markov process.
Recall that the transition operator K
t
of the Markov process R(t) is given by:
K
t
(u) = E((R(t)) | R(0) = u), t > 0
and the innitesimal generator of {K
t
: t > 0} is the linear operator A dened by
A(x) = lim
t0
K
t
(x) (x)
t
for all real-valued, bounded, Borel measurable function . The domain of A is denoted
by D
A
.
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Now, using the It os formula for Levy processes, we see that the innitesimal gen-
erator for R(t) is given on its domain D
A
by (see for more details [9])
A(x) =
1
2
(
2
x
2
+
2
)
d
2
(x)
dx
2
+ (ax +c)
d(x)
dx
+
_
+
0
[(x y) (x)] f
X
(x) dx
+
_
+
1
[(x +xy) (x)] f
Y
(y) dy.
(2.5)
Throughout this paper, we assume that the inter-arrival times: (
k
)
k1
due to the
insurance business process {P(t) : t 0}, and the inter-arrival times (

k
)
k1
caused
by oscillations due to the stochastic return process on investments {I(t) : t 0}, are
independent and have the same common density function (f := f

= f

). We assume
that f satises an ordinary dierential equation of order n 2 and with constant
coecients, formally denoted by
L(
d
dt
)f(t) = 0, (2.6)
with L

denoting the formal adjoint of the linear operator L. In general, the linear
operator L is dened by
L(
d
dt
)f(t) =
n

j=0

j
d
j
dt
j
f(t), (2.7)
with the adjoint L

,
L

(
d
dt
)f(t) =
n

j=0
(1)
j

j
d
j
dt
j
f(t). (2.8)
Now, dene
T
u
= inf{t 0 ; R(t) 0 | R(0) = u} (, otherwise), (2.9)
to be the time of ruin of (2.4) and
(u) = P(T
u
< | R(0) = u) = P[ inf{t 0 ; R(t) 0 | R(0) = u}], (2.10)
to be the ultimate ruin probability with an initial surplus u.
Next, for 0 dene

(u) = E(e
Tu
1
{Tu<}
| R(0) = u), (2.11)
where 1
{.}
is the usual indicator function, to be the Laplace transform of the time of
ruin with an initial surplus u.
Since the risk process (2.4) has the strong Markov property, then it will be restarted
at any nite stopping time T from R(T). Thus, if T
1
= t < T

1
and the rst claim X
1
= x
with
x (u, t) := e
(a

2
2
)t+B(t)
_
u +
_
t
0
e
(a

2
2
)sB(s)
(c ds +d W(s))
_
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then the ruin does not occur, else (x > (u, t)) the ruin occurs. On the other hand,
if T
1
> T

1
= t with X
1
= x, the ruin does not occur. Thus, from the independence
of T
1
and T

1
, the Laplace transform of the time of ruin with an initial surplus u is
expressible as: (see for more details [16])

(u) = E(e
Tu
1
{Tu<}
1
{T
1
<T

1
}
| R(0) = u) +E(e
Tu
1
{Tu<}
1
{T
1
>T

1
}
| R(0) = u).
(2.12)
The loading of security is dened by = c E[N(t)]. If > 0, then the activity
is known as protable. Indeed, the Law of Large Numbers ensures that, in this case,
the process P(t) + a. s. as t +, and consequently (u) = 1. If < 0,
then P(t) a. s. as t +. Generally, we will make the assumption that
the activity is protable.
Consider the embedded discrete-time process {R
n
: n 0} dened by R
n
:= R(T
n
).
For stopping times S < T, the relation (2.4) generalizes straightforwardly
R(T) =
U(T)
U(S)
_
R(S) +
_
T
S
U(S)
U(t

)
d P(t)
_
. (2.13)
From the above equation (2.13) one obtains
R
n
=
n
R
n1
+
n
X
n
, n 1, (2.14)
with R
0
= u, where {(
n
,
n
) : n 1} is a sequence of i.i.d. pairs of random variables
distributed as (, ) dened by
= U(
1
) = exp
_
(a
1
2

2
)
1
+B(
1
)
_M(
1
)

k=1
(1 +Y
k
),
= U(
1
)
_

1
0
1
U(t

)
(cdt +d W(t)).
By convention,

0
k=1
(1+Y
k
) = 1, (see for more details Kalashnikov and Norberg (2002),
Jun Cai (2004), and Kam-Chuen Yuen and Guojing Wang (2006) ).
The relation (2.14) can be written, in nance sense, immediately after the payment
of the nth claim X
n
, due to the insurance business process {P(t) : t 0}, as the
following
R
n
= V
R
n1
n
X
n
, n 1, (2.15)
where V
R
n1
n
:=
n
R
n1
+
n
represents the worth of a portfolio that results from
investing the capital R
n1
(immediately after the payment of the (n 1)th claim)
and the premiums collected over the time
n
, due to the insurance business process
{P(t) : t 0}, into a risky asset (see for more details, the case of a stochastic return
without jumps on investments, [2, 3, 4]). In general, for each t > 0
V
u
t
:= V
t
= U(t)
_
u +
_
t
0
1
U(s

)
(cds +dW(s))
_
represents the worth of a portfolio that invest the initial capital u and the incoming
premiums over the time t in a risk asset, such that V
0
= R(0) = u.
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Recall that for the discrete-time Markov process {(R
n
)
nN
| R(0) = u}, the tran-
sition operator P is dened, on the set of all real-valued, bounded, Borel-measurable
functions , by P : R
+
R,
P(u) := E((R(T
1
)) | R(0) = u)
= E
_

_
uU(T
1
) +
_
T
1
0
U(T
1
)
U(s

)
(cds +d W(s)) X
1
_
| R(0) = u
_
=
_

0
_

0
E
_

_
uU(t) +
_
t
0
U(t)
U(s

)
(cds +d W(s)) x
_
| R(0) = u, T
1
= t, X
1
= x
_
P[T
1
dt, X
1
dx]
=
_

0
_

0
E
_

_
uU(t) +
_
t
0
U(t)
U(s

)
(cds +d W(s)) x
_
| R(0) = u, T
1
= t, X
1
= x
_
f(t)f
X
(x) dt dx.
(2.16)
The generator of the discrete-time Markov process is given by:
A
R
(u) = (P I)(u), (2.17)
where I is the identity operator, and D
A
R
denotes the domain of the generator A
R
.
Particular Case: Stochastic return without jumps on investments
Let {I(t) : t 0} be a Brownian motion with positive drift, that is,
I(t) = at +B(t), t 0, (2.18)
where a, and {B(t) : t 0} are expressible as in equation (2.2). In this case the
reserve process is given by
R(t) = U(t)
_
u +
_
t
0
1
U(s

)
d P(s)
_
, t 0, (2.19)
where
U(t) = exp
_
(a
1
2

2
)t +B(t)
_
, t 0,
is the Black-Scholes stock price process. The innitesimal generator for the reserve
process {R(t) : t 0}, is given on its domain D
A
by
A(x) =
1
2
(
2
x
2
+
2
)
d
2
(x)
dx
2
+ (ax +c)
d(x)
dx
+
_
+
0
[(x y) (x)] f
X
(x) dx.
(2.20)
The discrete version of {R(t) : t 0} is
R(T
n
) :=
n
R
n1
+
n
X
n
= V
R
n1
n
X
n
, n 1,
(2.21)
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where {(
n
,
n
) : n 1} is a sequence of i.i.d. pairs of random variables distributed as
(, ) dened by
= U(
1
) = exp
_
(a
1
2

2
)
1
+B(
1
)
_
,
= cU(
1
)
_

1
0
1
U(t

)
(cdt +d W(t))
and V
R
n1
n
=
n
R
n1
+
n
.
3 The integro-dierential equation of the Laplace trans-
form of the time of ruin
Paulsen and Gjessing (1997) introduce a relationship between the innitesimal gener-
ator of the risk Cramer-Lundberg model perturbed by diusion with stochastic return
on investments and the two quantities of ruin (probability of ruin, Laplace transform of
the time of ruin). Now, our main result is based on the Theorem 2.1 p. 968 of Paulsen
and Gjessing (1997). Let
F(u) = P
__
+
0
1
U(t

)
d P(t) < u
_
.
Proposition 3.1 Assume that, almost surely
1) U(t) as t ,
2)
_
t
0
1
U(s

)
d P(s) converges to a nite limit,
3) F(0) > 0.
Then F(u) solve AF(u) = 0 onu > 0.
Proof.
Let U(t) = e
t
such that
t
and P(t) are independent Levy processes, then
F(u) = P
__
+
0
1
U(s

)
d P(s) < u
_
= P
_
U(t)
_
+
t
1
U(s

)
d P(s) < U(t)
_
u +
_
t
0
1
U(s

)
d P(s)
__
= P
__
+
t
e
ts

d P(s) < e
t
_
u +
_
t
0
e
s

d P(s)
__
= P
__
+
t
e

st
d P(s) < R(t)
_
= P
__
+
0
e
s

d P(s) < R(t)

_
= P
__
+
0
1
U(s

)
d P(s) < R(t)
_
= E(F(R(t)) | R(0) = u)
= PF(u).
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Hence F(u) is P invariant which implies AF(u) = 0 onu > 0.

Remark :
We show that the distribution function, for the random variable
_
+
0
1
U(t

)
d P(t), is
P invariant. Indeed
F(u) := P
__
+
0
1
U(s

)
d P(s) < u
_
= E(F(R(t)) | R(0) = u) .
Example
Let
P(t) = ct +W(t), I(t) = at +B(t).
Assume that a
1
2

2
> 0, = 0 and = 0. Then the random variable
_
+
0
e
(a
1
2

2
)tB(t)
d(ct +W(t))
has a density h given by
h(x) :=
h
0
(
2
+
2
x
2
)
1
2
+
a

2
exp
_
2c

arctan(

x)
_
,
with h
0
as a normalizing constant (the example also appears in the paper of J. Paulsen
and H. K. Gjessing [10]). The corresponding Generalized Orentein-Uhlenbeck process
is
R(t) = U(t)
_
u +
_
t
0
1
U(s

)
d P(s)
_
, t 0,
with
U(t) = exp
_
(a
1
2

2
)t +B(t)
_
, t 0.
The associated generator is given, on its domain D
A
, by
A(x) =
1
2
(
2
x
2
+
2
)
d
2
(x)
dx
2
+ (ax +c)
d(x)
dx
.
Then
F(x) =
_
x

h
0
(
2
+
2
y
2
)
1
2
+
a

2
exp
_
2c

arctan(

y)
_
dy, x > 0
satises AF = 0 onu > 0.
Theorem 3.2 Let q

D
A
, 0 with Pq

(u) = q

(u). If f, the common density func-

tion of the inter-arrival times: (
k
)
k1
and (

k
)
k1
, satises the ordinary dierential
equation of order n 2 and with constant coecients
L(
d
dt
)f(t) = 0
and
1) f
(k)
(0) = 0, for 0 k n 2,
8
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
2) lim
x
f
(k)
(x) = 0, for 0 k n 1,
then
L

(AI)Pq

(u) = f
(n1)
(0) E[q

(u X
1
)] +f
(n1)
(0) E[q

(u(1 +Y
1
))]. (3.1)
Proof.
Dene M
t
= E
_
1
{inf(t 0 : R(t) 0)}
| F
t
_
, with F
t
= (R(s) : 0 s t). Then
{M(t) : t 0} is an F
t
martingale. Assume that T = T
1
T

1
, it is obvious that T is
a stopping time with respect to the ltration F
t
. Then, by the independence of T
1
and
T

1
and the homogenous strong Markov property of R(t), one obtains
Pq

(u) := E(q

(R(T)) | R(0) = u)
= E(q

(R(T
1
))1
{T
1
<T

1
}
| R(0) = u) +E(q

(R(T

1
))1
{T
1
>T

1
}
| R(0) = u)
=
_

0
_

0
E
_
q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x
_
f(t)f
X
(x) dt dx
+
_

1
_

0
E
_
q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y
_
f(t)f
Y
(y) dt dy.
Where R(T

1
) = Z
u
T

1
(1 +Y
1
), such that
Z
u
T

1
:= Z
T

1
= exp
_
(a
1
2

2
)T

1
+B(T

1
)
_
_
u +
_
T

1
0
exp
_
(a
1
2

2
)t B(t)
_
d P(t)
_
, Z
0
=
R(0) = u.
Since
n

j=0

j
d
j
dt
j
f(t) = 0, then f(t) =
1

0
n

j=1

j
d
j
dt
j
f(t). It follows that (after a per-
mutation of sum and double integral)
Pq

(u) =
1

0
n

j=1

j
_

0
_

0
d
j
dt
j
f(t) E
_
q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x
_
f
X
(x) dt dx

0
n

j=1

j
_

1
_

0
d
j
dt
j
f(t) E
_
q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y
_
f
Y
(y) dt dy.
Using integration by parts j times and the hypothesis on the derivatives of f, it further
equals
Pq

(u) =
1

0
_

0
f
X
(x) E(q

(V
0
x) | V
0
= u, X
1
= x) f
(n1)
(0)dx

_

0
_

0
1

0
n

j=1
(1)
j

j
d
j
dt
j
E
_
q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x
_
f(t) f
X
(x) dt dx
+
1

0
_

1
f
Y
(y) E(q

(Z
0
(1 +y)) | Z
0
= u, Y
1
= y) f
(n1)
(0)dy

_

1
_

0
1

0
n

j=1
(1)
j

j
d
j
dt
j
E
_
q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y
_
f(t) f
Y
(y) dt dy.
9
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
Now, using Kolmogorovs backward equation and the fact that E(q

(V
t
x) | V
0
= u)
and AI also E(q

(Z
t
(1 +y)) | Z
0
= u) and AI commute on D
A
, one has
d
dt
E(q

(V
t
x) | V
0
= u) = (AI) E(q

(V
t
x) | V
0
= u)
= E((AI)[q

(V
t
x) | V
0
= u]) ,
and
d
dt
E(q

(Z
t
(1 +y)) | Z
0
= u) = (AI) E(q

(Z
t
(1 +y)) | Z
0
= u)
= E((AI)[q

(Z
t
(1 +y)) | Z
0
= u]) .
Then, one obtains
Pq

(u) =
1

0
_

0
f
X
(x) E(q

(V
0
x) | V
0
= u, X
1
= x) f
(n1)
(0)dx

_

0
_

0
1

0
n

j=1
(1)
j

j
E
_
(AI)
(j)
_
q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x

_
f(t) f
X
(x) dt dx
+
1

0
_

1
f
Y
(y) E(q

(Z
0
(1 +y)) | Z
0
= u, Y
1
= y) f
(n1)
(0)dy

_

1
_

0
1

0
n

j=1
(1)
j

j
E
_
(AI)
(j)
_
q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y

_
f(t) f
Y
(y) dt dy.
Where (AI)
(j)
q

= ((AI)(AI)(AI)...) q

, j times. Adding and subtract-

ing to the right-hand side of the equality
P
1
q

(u) := E
_
q

(V
T
1
X
1
)1
{T
1
<T

1
}
| V
0
= u
_
=
_

0
_

0
1

0
E
_
(AI)
(0)
[q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x]
_
f(t) f
X
(x) dt dx
and
P
2
q

(u) := E
_
q

(Z
T

1
(1 +Y
1
))1
{T
1
>T

1
}
| Z
0
= u
_
=
_

1
_

0
1

0
E
_
(AI)
(0)
[q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y]
_
f(t) f
Y
(y) dt dy.
Inductively, the equality becomes:
Pq

(u) = P
1
q

(u) +
1

0
_

0
f
X
(x) E(q

(V
0
x) | V
0
= u, X
1
= x) f
(n1)
(0)dx

_

0
_

0
1

0
n

j=0
(1)
j

j
E
_
(AI)
(j)
_
q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x

_
f(t) f
X
(x) dt dx
10
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
+P
2
q

(u) +
1

0
_

1
f
Y
(y) E(q

(Z
0
(1 +y)) | Z
0
= u, Y
1
= y) f
(n1)
(0)dy

_

1
_

0
1

0
n

j=0
(1)
j

j
E
_
(AI)
(j)
_
q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y

_
f(t) f
Y
(y) dt dy.
One permute sum and expectation and using the denition of the adjoint operator L

,
the equality becomes:
Pq

(u) = P
1
q

(u) +
1

0
_

0
f
X
(x) E(q

(V
0
x) | V
0
= u, X
1
= x) f
(n1)
(0)dx

_

0
_

0
1

0
E
_
L

(AI)
_
q

(V
t
x) | V
0
= u, T
1
= t < T

1
, X
1
= x
_
f(t) f
X
(x) dt dx
+P
2
q

(u) +
1

0
_

1
f
Y
(y) E(q

(Z
0
(1 +y)) | Z
0
= u, Y
1
= y) f
(n1)
(0)dy

_

1
_

0
1

0
E
_
L

(AI)
_
q

(Z
t
(1 +y)) | Z
0
= u, T
1
> T

1
= t, Y
1
= y
_
f(t) f
Y
(y) dt dy
= P
1
q

(u) +
1

0
f
(n1)
(0)E[q

(u X
1
)] +P
2
q

(u) +
1

0
f
(n1)
(0)E[q

(u(1 +Y
1
))]

0
E(L

(AI)[q

(V
T
1
X
1
)1
{T
1
<T

1
}
| V
0
= u])

0
E(L

(AI)[q

(Z
T

1
(1 +Y
1
))1
{T
1
>T

1
}
| Z
0
= u]).
Since A I and P commute on domain D
A
, then inductively, by the linearity of the
expected value,
EL

(AI) = L

(AI)E. Thus one obtains

Pq

(u) = P
1
q

(u) +
1

0
f
(n1)
(0)E[q

(u X
1
)] +P
2
q

(u) +
1

0
f
(n1)
(0)E[q

(u(1 +Y
1
))]

0
L

(AI) E(q

(V
T
1
X
1
)1
{T
1
<T

1
}
| V
0
= u)

0
L

(AI) E(q

(Z
T

1
(1 +Y
1
))1
{T
1
>T

1
}
| Z
0
= u).
In other words, for any function q

D
A
such that Pq

(u) := P
1
q

(u) + P
2
q

(u), one
obtains
0 =
1

0
f
(n1)
(0) (E[q

(u X
1
)] +E[q

(u(1 +Y
1
))])

0
L

(AI)
_
E(q

(V
T
1
X
1
)1
{T
1
<T

1
}
| V
0
= u) +E(q

(Z
T

1
(1 +Y
1
))1
{T
1
>T

1
}
| Z
0
= u)
_
,
this is equivalent to:
L

(AI)Pq

(u) = f
(n1)
(0) E[q

(u X
1
)] +f
(n1)
(0) E[q

(u(1 +Y
1
))].

Theorem 3.3 Assume that on the event {T

u
= }, R(t) as t and

is P invariant. Then the following properties are equivalent:

11
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
1) Any function q

D
A
such that q

(R(t)) = e
t
g(R(t)); t, 0 together with
the following boundary conditions for the function g :
a) g(u) = 1 on u < 0,
b) g(0) = 1 if
2
> 0,
c) lim
u
g(u) = 0,
2) q

(u) is the Laplace transform of the time of ruin, in other words

q

(u) =

(u).
Proof.
First part 1) = 2).
Let
E
u
[q

(R
n
)] = E
u
[q

(R(T
n
))] = E(q

(R(T
n
)) | R(0) = u).
It is known that (R
n
)
n1
is a martingale, then q

(R
n
)
n1
is also a martingale i.e. for
any n 1,
q

(u) = E
u
[q

(R(T
n
))] = E
u
[e
Tn
g(R(T
n
))],
where T
n
is the time of the nth claim.
The time of ruin T
u
is a stopping time, thus
q

(u) = E
u
[q

(R(T
u
))] = E
u
[e
Tu
g(R(T
u
))].
Moreover
q

(u) = E
u
[q

(R(T
u
T
n
))]
= E
u
[e
(TuTn)
g(R(T
u
T
n
))]
= E
u
[e
Tu
g(R(T
u
))1
{Tu<Tn}
] +E
u
[e
Tn
g(R(T
n
))1
{Tn<Tu}
].
Since R(T
u
) < 0, then g(R(T
u
)) = 1 and
q

(u) = E
u
[e
Tu
1
{Tu<Tn}
] +E
u
[g(R(T
n
))e
Tn
1
{Tn<Tu}
].
The result thus follows by letting T
n
and using the boundary condition c), for
the function g,
q

(u) = E
u
[e
Tu
1
{Tu<}
].
When
2
> 0 the process starting from 0 will immediately assume a negative value,
hence the extra boundary condition q

(0) = g(0) = 1. This proves rst part.

Second part 2) = 1).
Since the process R
n
is a renewal process and since ruin cannot occur in the interval
(0, T
1
), where T
1
represents the time of the rst claim due to the insurance business
process {P(t) : t 0}, then the Laplace transform of the time of ruin satises the
renewal equation,
q

(u) = E
u
[q

(R
1
)] = Pq

(u).
12
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
And since, q

is the Laplace transform of the time of ruin, it also satises the boundary
conditions.

Combining Theorem 3.2 with Theorem 3.3 above, we get that the Laplace transform
of the time of ruin satises the following integro-dierential equation:
L

(AI)

(u) = f
(n1)
(0)
_

0

(ux)f
X
(x) dx+f
(n1)
(0)
_

1

(u+uy)f
Y
(y) dy,
(3.2)
together with the boundary conditions:
a) lim
u

(u) = 0,
b)

(0) = 1 if
2
> 0,
c) (BC),
where (BC) stands for boundary conditions and n 2 represents the degree of the
ordinary dierential equation satised by the density of the inter-arrival times. The
boundary conditions (BC) may be derived from compatibility conditions assuming
that the integro-dierential equation and its derivatives hold at zero. For instance, if
the investment is a geometric Levy process then the equation has order 2n.
3.1 Applications
Many well-known equations are a particular form of the equation (3.2). For instance,
in the risk model with stochastic return on investments given by (2.4), the equations
and their boundary conditions can be derived for dierent inter-arrival times.
Example 1: Erlang(2, )
Assume that the surplus model (2.4) has inter-arrival times
k
, due to the insurance
business process (2.1), and inter-arrival times

k
, caused by oscillations due to the
stochastic return process on investments (2.2), that are Erlang(2, ), distributed with
the common density function
f(t) :=
2
t exp{t}, t > 0.
Then for an Erlang(2, ) distribution, L(
d
dt
) = (
d
dt
+ )
2
, and L

(
d
dt
) = (
d
dt
+ )
2
.
Hence, the equation (3.2) is specically:
(A+I+I)
2

(u) = f
(1)
(0)
_

0

(ux)f
X
(x) dx+f
(1)
(0)
_

1

(u+uy)f
Y
(y) dy,
(3.3)
with the boundary conditions:
a) lim
u

(u) = 0,
b)

(0) = 1 if
2
> 0,
c) AA

(0) 2( +)A

(0) + ( +)
2

(0) = 2
2
,
d) the rst two derivatives of the equation (3.3) evaluated at zero.
13
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
The equation (3.3) is equivalent to
AA

(u) 2( +)A

(u) + ( +)
2

(u) =
2
_
u
0

(u x)f
X
(x) dx +
2
_

u
f
X
(x) dx
+
2
_
+
1

(u +uy)f
Y
(y) dy,
(3.4)
where
A

(u) =
1
2
(
2
u
2
+
2
)
d
2

(u)
du
2
+ (au +c)
d

(u)
du
+
_
+
0
[

(u x)

(u)] f
X
(x) dx
+
_
+
1
[

(u +uy)

(u)] f
Y
(y) dy
and
AA

(u) =
1
2
(
2
u
2
+
2
)
d
2
A

(u)
du
2
+ (au +c)
dA

(u)
du
+
_
+
0
[A

(u x) A

(u)] f
X
(x) dx
+
_
+
1
[A

(u +uy) A

(u)] f
Y
(y) dy,
with (by taking account of derivation theorem under integral sign)
dA

(u)
du
=
1
2
(
2
u
2
+
2
)
(3)

(u) + (
2
u +au +c)
(2)

(u) +a
(1)

(u)
+
_
+
0
_

(1)

(u x)
(1)

(u)
_
f
X
(x) dx
+
_
+
1
_
(1 +y)
(1)

(u +uy)
(1)

(u)
_
f
Y
(y) dy
and
d
2
A

(u)
du
2
=
1
2
(
2
u
2
+
2
)
(4)

(u) + (2
2
u +au +c)
(3)

(u) + (2a +
2
)
(2)

(u)
+
_
+
0
_

(2)

(u x)
(2)

(u)
_
f
X
(x) dx
+
_
+
1
_
(1 +y)
(2)

(2)

(u +uy)
(2)

(u)
_
f
Y
(y) dy.
With the boundary conditions obtained from the fact that the equation holds at zero
and so do the rst two derivatives of the equation.
Example 2: Erlang(n, )
Assume that the surplus model (2.4) has inter-arrival times
k
, due to the insurance
business process (2.1), and inter-arrival times

k
, caused by oscillations due to the
stochastic return process on investments (2.2), that are Erlang(n, ), distributed with
the common density function
f(t) :=

n
(n)
t
n1
exp{t}, t > 0 and n 2.
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Then for an Erlang(n, ) distribution, L(
d
dt
) = (
d
dt
+ )
n
, and L

(
d
dt
) = (
d
dt
+ )
n
.
Hence, the equation (3.2) is specically:
n

k=0
(1)
k
n!
k!(n k)!
A
k
( +)
nk

(u) =
n
_
u
0

(u x)f
X
(x) dx +
n
_

u
f
X
(x) dx
+
n
_

1

(u +uy)f
Y
(y) dy,
(3.5)
with the boundary conditions:
a) lim
u

(u) = 0,
b)

(0) = 1 if
2
> 0,
c)

n
k=0
(1)
k n!
k!(nk)!
A
k
( +)
nk

(0) = 2
n
,
d) the rst 2n 2 derivatives of the equation (3.5) evaluated at zero.
Example 3: Sum of two exponentials
Assume that the surplus model (2.4) has inter-arrival times
k
, due to the insurance
business process (2.1), and inter-arrival times

k
, caused by oscillations due to the
stochastic return process on investments (2.2), that are sum of two exponentials, with
the common density function
f(t) :=

1

1
[exp{
1
t} exp{
2
t}], t > 0 and
1
=
2
.
In the case of inter-arrival times distributed as a mixture of exponentials, L(
d
dt
) =
(
d
dt
+
1
)(
d
dt
+
2
), and L

(
d
dt
) = (
d
dt
+
1
)(
d
dt
+
2
). Thus the equation (3.2) is
specically:
H(u) :=
1

2
_
u
0

(u x)f
X
(x) dx +
1

2
_

u
f
X
(x) dx +
1

2
_

1

(u +uy)f
Y
(y) dy
= AA

(u) (
1
+
2
+ 2)A

(u) + [
1

2
+ (
1
+
2
) +
2
]

(u),
(3.6)
with the boundary conditions:
a) lim
u

(u) = 0,
b)

(0) = 1 if
2
> 0,
c) AA

(0) (
1
+
2
+ 2)A

(0) + [
1

2
+ (
1
+
2
) +
2
]

(0) = 2
1

2
,
d) the rst two derivatives of the equation (3.6) evaluated at zero.
Thus, the explicit equation for the Laplace transform of the time of ruin in risk model
with stochastic return on investments with an inter-arrival times distributed as a sum
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of two exponentials is a forth order integro-dierential equation:
H(u) =
_

2
2
u
2
+

2
2
_
2

(4)

(u) + (
2
u
2
+
2
)(au +
2
u +c)
(3)

(u)
+
_
(
2
u
2
+
2
)(a +

2
2


1
+
2
2
u u)
_

(2)

(u)
+(au +c)(
2
u +au +c)
(2)

(u)
+(au +c)(a
1

2
2)
(1)

(u)
+
_
+
0
[A

(u x) A

(u)] f
X
(x) dx
+
_
+
1
[A

(u +uy) A

(u)] f
Y
(y) dy
+(

2
2
u
2
+

2
2
)
_
+
0
_

(2)

(u x)
(2)

(u)
_
f
X
(x) dx
+(

2
2
u
2
+

2
2
)
_
+
1
_
(1 +y)
(2)

(2)

(u +uy)
(2)

(u)
_
f
Y
(y) dy
+(au +c)
_
+
0
_

(1)

(u x)
(1)

(u)
_
f
X
(x) dx
+(au +c)
_
+
1
_
(1 +y)
(1)

(u +uy)
(1)

(u)
_
f
Y
(y) dy
(
1
+
2
+ 2)
_
+
0
[

(u x)

(u)] f
X
(x) dx
(
1
+
2
+ 2)
_
+
1
[

(u +uy)

(u)] f
Y
(y) dy
+
_

2
+ (
1
+
2
) +
2

(u),
(3.7)
with the boundary conditions obtained from the fact that the equation holds at zero
and so do the rst two derivatives of the equation.
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