Optimal Investment and Premium Policies under Risk Shifting and Solvency Regulation
39 Pages Posted: 3 Sep 2009 Last revised: 22 Aug 2013
Date Written: August 21, 2013
Limited liability creates an incentive for insurers to increase the risk of the assets and liabilities at the expense of policyholders. We show that solvency capital requirements restrict the set of feasible investment and premium policies and can thereby improve efficiency under the risk shifting problem. This finding becomes particularly important in light of Solvency II, the forthcoming European risk-based solvency regime for insurers. We provide evidence for Solvency II related efficiency effects in a calibration study for a non-life insurer average portfolio.
Keywords: Risk Shifting, Insurance, Regulation, Solvency II, Pareto Optimality
JEL Classification: D82, G11, G22, G28
Suggested Citation: Suggested Citation