On the time value of absolute ruin with tax

Consider a compound Poisson surplus process of an insurer with debit interest and tax payments. When the portfolio is in a profitable situation, the insurer may pay a certain proportion of the premium income as tax payments. When the portfolio is below zero, the insurer could borrow money at a debit interest rate to continue his/her business. Meanwhile, the insurer will repay the debts from his/her premium income. The negative surplus may return to a positive level except that the surplus is below a certain critical level. In the latter case, we say that absolute ruin occurs. In this paper, we discuss absolute ruin quantities by defining an expected discounted penalty function at absolute ruin. First, a system of integro-differential equations satisfied by the expected discounted penalty function is derived. Second, closed-form expressions for the expected discounted total sum of tax payments until absolute ruin and the Laplace–Stieltjes transform (LST) of the total duration of negative surplus are obtained. Third, for exponential individual claims, closed-form expressions for the absolute ruin probability, the LST of the time to absolute ruin, the distribution function of the deficit at absolute ruin and the expected accumulated discounted tax are given. Fourth, for general individual claim distributions, when the initial surplus goes to infinity, we show that the ratio of the absolute ruin probability with tax to that without tax goes to a positive constant which is greater than one. Finally, we investigate the asymptotic behavior of the absolute ruin probability of a modified risk model where the interest rate on a positive surplus is involved.