Actuarial studies seminar - Dr Jiannan Zhang - University of International Business & Economics

A seminar by Dr Jiannan Zhang from University of International Business & Economics

Title: Technology and Insurance for Climate Risk Management Under Uncertainty

Abstract: This paper investigates the optimal timing for a firm to invest in green technology to mitigate the adverse effects of climate change on its consumption, while incorporating insurance to transfer climate-related risks. The firm faces uncertainties in the probability of catastrophic events, which cannot be directly observed. This incomplete information adds a layer of complexity to the decision-making process. We adopt a Bayesian learning approach to model uncertainty through a posterior belief process, with the objective of maximizing the firm’s expected consumption by determining the optimal investment threshold. In high-dimensional settings, the classical smooth-fit condition may fail, rendering standard optimal stopping methods inadequate. To address this, we employ state-space transformations and probabilistic techniques to handle irregularities in the value function and the structure of the free boundary. Our framework enhances the tractability and flexibility of solving complex optimal control problems under uncertainty. A numerical example illustrates how key parameters influence the optimal investment boundary.

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