2011/03/09 by Damir Filipović, Filipović, Damir, Robert Kremslehner +3 · 1 citation
Agricultural and Biological Sciences · Economics, Econometrics and Finance · Social Sciences · #Agricultural risk and resilience #FOS: Economics and business #Insurance and Financial Risk Management #Insurance, Mortality, Demography, Risk Management #Portfolio Management (q-fin.PM) #Risk Management (q-fin.RM) #q-fin.PM #q-fin.RM
paper · pdf · doi:10.48550/arxiv.1103.1729
arxiv created 2011/03/09 · openalex publication_date 2011/03/09 · arxiv updated 2011/03/10 · openalex created_date 2022/10/02 · openalex updated_date 2026/07/28
Limited liability creates a conflict of interests between policyholders and shareholders of insurance companies. It provides shareholders with incentives to increase the risk of the insurer's assets and liabilities which, in turn, might reduce the value policyholders attach to and premiums they are willing to pay for insurance coverage. We characterize Pareto optimal investment and premium policies in this context and provide necessary and sufficient conditions for their existence and uniqueness. We then identify investment and premium policies under the risk shifting problem if shareholders cannot credibly commit to an investment strategy before policies are sold and premiums are paid. Last, we analyze the effect of solvency regulation, such as Solvency II or the Swiss Solvency Test, on the agency cost of the risk shifting problem and calibrate our model to a non-life insurer average portfolio.