A simple model of financial grey rhino under insurer capital regulation. Issue 46 (1st October 2020)

• Record Type: Journal Article
• Authors: Huang, Fu-Wei
• Is Part Of: Applied economics. Volume 52:Issue 46(2020)
• Page Start: 5088
• Page End: 5097
• Publication Date: 2020-10-01
• Subjects: Financial grey rhino -- guaranteed rate -- capital regulation -- insurer survival; G21 -- G28; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2020.1752905
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: This paper develops a contingent claim model to examine how capital regulation affects an insurer's optimal guaranteed rate and survival probability when the investment-oriented/life insurance policy-oriented financial grey rhino is complemented. The investment-oriented grey rhino effect increases the policies at an increased guaranteed rate (and thus a decreased interest margin) and further decreases the insurer's survival probability. The policy-oriented grey rhino effect decreases the guaranteed rate and further decreases the survival probability. Stringent capital regulation enhances both the guaranteed rate and the insurer's survival, thereby contributing to insurance stability. Both the enhanced effects become more significant when either the increased investment-oriented or policy-oriented financial grey rhino effect is considered, in particular, in a down-and-out call option framework model.