OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION. Issue 3 (16th May 2016)

• Record Type: Journal Article
• Authors: Chen, An; Hieber, Peter
• Is Part Of: ASTIN bulletin. Volume 46:Issue 3(2016)
• Page Start: 605
• Page End: 626
• Publication Date: 2016-05-16
• Subjects: Regulation, -- life insurance, -- default risk, -- utility maximization, -- risk sharing, -- multiobjective optimization; Insurance -- Mathematics -- Periodicals; Risk (Insurance) -- Mathematics -- Periodicals; 368.01
• DOI: 10.1017/asb.2016.12
• Languages: English
• ISSNs: 0515-0361

Abstract

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.