This paper presents applications of stochastic control theory in determining an insurer's optimal reinsurance and rating policy. Optimality is defined by means of variances of such variables as underwriting result of the insurer, solvency margins of the insurer and reinsurer and the premiums paid by policyholders.

This paper generates a typology of balance-of-payments crises under rational expectations, namely liquidity crises and solvency crises. The ex-post application of official financial rescue packages of sufficient size is a perfect cure for liquidity crises but amounts to an ineffective and costly bailout of private investors in the case of solvency crises. The anticipation of the rescue program ...