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Optimization of Price, Default Ratio and Capital under Regulatory Criterion of Maximizing Social Benefit

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  • Mao Hong

    (Shanghai Second Polytechnic University, Shanghai, China)

  • Wen Zhongkai

    (The University of Illinois at Chicago, Chicago, United States of America)

Abstract

In this paper, we explore the optimal price, default ratio, and capital for insurance companies under social welfare maximization from regulators' perspective. From comparisons of cases under symmetric and asymmetric information in the insurance market, we find that an optimal regulatory objective should be set to maximize social benefit and induce fair benefit distribution in a transparent insurance market, and direct regulation on capital constraint can increase insurance demand and shareholders' benefits in a non-transparent market.

Suggested Citation

  • Mao Hong & Wen Zhongkai, 2018. "Optimization of Price, Default Ratio and Capital under Regulatory Criterion of Maximizing Social Benefit," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 12(2), pages 1-15, July.
    • Handle: RePEc:bpj:apjrin:v:12:y:2018:i:2:p:15:n:1
    DOI: 10.1515/apjri-2017-0008
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    References listed on IDEAS

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    1. Hong Mao & Krzysztof M. Ostaszewski, 2007. "Application of Game Theory to Pricing of Participating Deferred Annuity," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 30(2), pages 102-121.
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    4. Zimmer, Anja & Schade, Christian & Gründl, Helmut, 2009. "Is default risk acceptable when purchasing insurance? Experimental evidence for different probability representations, reasons for default, and framings," Journal of Economic Psychology, Elsevier, vol. 30(1), pages 11-23, February.
    5. Rustam Ibragimov & Dwight Jaffee & Johan Walden, 2010. "Pricing and Capital Allocation for Multiline Insurance Firms," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(3), pages 551-578, September.
    6. Dasgupta, Sudipto & Nanda, Vikram, 1993. "Bargaining and brinkmanship : Capital structure choice by regulated firms," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 475-497.
    7. Chen, An & Suchanecki, Michael, 2007. "Default risk, bankruptcy procedures and the market value of life insurance liabilities," Insurance: Mathematics and Economics, Elsevier, vol. 40(2), pages 231-255, March.
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