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OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION

Published online by Cambridge University Press:  16 May 2016

An Chen  and
Peter Hieber
An Chen
Affiliation:
Institute of Insurance Science, University of Ulm, Helmholtzstr. 20, 89069 Ulm, Germany E-Mail: an.chen@uni-ulm.de
Peter Hieber*
Affiliation:
Institute of Insurance Science, University of Ulm, Helmholtzstr. 20, 89069 Ulm, Germany
*
E-Mail: peter.hieber@uni-ulm.de
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Abstract

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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

Regulationlife insurancedefault riskutility maximizationrisk sharingmultiobjective optimization
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 46 , Issue 3 , September 2016 , pp. 605 - 626
Copyright
Copyright © Astin Bulletin 2016 

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