OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION

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 tha...

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Bibliographic Details
Published in:ASTIN Bulletin : The Journal of the IAA 2016-09, Vol.46 (3), p.605-626
Main Authors: Chen, An, Hieber, Peter
Format: Article
Language:English
Subjects:
Actuarial science
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Summary: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.
ISSN:0515-0361
1783-1350
DOI:10.1017/asb.2016.12