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Optimal Investment and Premium Policies under Risk Shifting and Solvency Regulation

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  • Damir Filipovi\'c
  • Robert Kremslehner
  • Alexander Muermann
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    Abstract

    Limited liability creates a conflict of interests between policyholders and shareholders of insurance companies. It provides shareholders with incentives to increase the risk of the insurer's assets and liabilities which, in turn, might reduce the value policyholders attach to and premiums they are willing to pay for insurance coverage. We characterize Pareto optimal investment and premium policies in this context and provide necessary and sufficient conditions for their existence and uniqueness. We then identify investment and premium policies under the risk shifting problem if shareholders cannot credibly commit to an investment strategy before policies are sold and premiums are paid. Last, we analyze the effect of solvency regulation, such as Solvency II or the Swiss Solvency Test, on the agency cost of the risk shifting problem and calibrate our model to a non-life insurer average portfolio.

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    File URL: http://arxiv.org/pdf/1103.1729
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1103.1729.

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    Date of creation: Mar 2011
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    Handle: RePEc:arx:papers:1103.1729

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    Web page: http://arxiv.org/

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