Optimal Asset Allocation in Life Insurance: The Impact of Regulation

ASTIN Bulletin, Vol. 46, No. 3 (2016), pp. 605-626

28 Pages Posted: 13 Jan 2015 Last revised: 26 Sep 2016

See all articles by An Chen

An Chen

University of Ulm

Peter Hieber

University of Ulm - Department of Mathematics and Economics; Technische Universität München (TUM) - Department of Mathematics

Date Written: January 12, 2015

Abstract

In a typical equity-linked life insurance contract, the insurance company is entitled to a share of return surpluses as compensation for the return guarantee granted to the policyholders. The set of possible contract terms might, however, be restricted by a regulatory default constraint - a fact that can force the two parties to initiate sub-optimal insurance contracts. We show that this effect can be mitigated if regulatory policy is more flexible. We suggest that the regulator implement a traffic light system where companies are forced to reduce the riskiness of their asset allocation in distress. In a utility-based framework, we show that the introduction of such a system can increase the benefits of the policyholder without deteriorating the benefits of the insurance company. At the same time, default probabilities (and thus solvency capital requirements) can be reduced.

Keywords: regulation, life insurance, credit risk, barrier options, utility maximization, contract design

JEL Classification: G11, G23

Suggested Citation

Chen, An and Hieber, Peter, Optimal Asset Allocation in Life Insurance: The Impact of Regulation (January 12, 2015). ASTIN Bulletin, Vol. 46, No. 3 (2016), pp. 605-626. Available at SSRN: https://ssrn.com/abstract=2548418 or http://dx.doi.org/10.2139/ssrn.2548418

An Chen

University of Ulm ( email )

Helmholtzstrasse 20
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Peter Hieber (Contact Author)

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Technische Universität München (TUM) - Department of Mathematics ( email )

Boltzmannstr. 3
Garching bei München, Bavaria 85748
Germany

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