2022, Vol. 7, Issue 5, Part A

This work investigates the impact of taxation on an investment strategy of an insurance company considering three utility functions; exponential, power, and logarithmic utility preferences. The risky asset is assumed to be driven by Constant Elasticity of Variance (CEV) model. The investment problem considered was insurance company that trades two assets; a risky stock with an investment behavior in the presence of a stochastic cash flow or a risk process and the money market account (bond), continuously in the economy. The Hamilton-Jacobi-Bellman (HJB) equation associated with the optimization problem is obtained using the Ito's lemma. Among others, it was found that in the case of power utility preference, the investment strategy, when there was taxation was more than the investment strategy when there was no taxation. Further found was that when exponential utility performance was adopted, the investment strategy when there was taxation was less than the strategy when there was no taxation. The impact of taxation on the investment strategy and choice of utility preference should be considered when making investment decisions.