Dividends and reinsurance under a penalty for ruin

► We find the optimal dividend strategy in a diffusion risk model under a penalty for ruin; not surprisingly, the optimal dividend strategy is a barrier strategy. ► We determine the optimal proportional reinsurance strategy, when so-called expensive reinsurance is available; that is, the premium loading on reinsurance is greater than the loading on the directly written insurance. ► We investigate the effect of penalty P on the optimal strategies. In particular, we show that the optimal barrier increases with respect to P, while the optimal proportion retained decreases with respect to P. ► We explore the time of ruin, and find that the expected time of ruin increases with respect to P under a net profit condition.