Optimal Investment and Premium Policies under Risk Shifting and Solvency Regulation

Description

Risk shifting is a well-known agency problem in corporate finance which also
exists between policyholders and shareholders of insurance companies.
Shareholders engage in excessive risk taking at the expense of policyholders
who, in turn, are less willing to pay for insurance coverage. Solvency
regulation addresses this incentive problem by restricting the set of
investment strategies and premium policies.
We first characterize Pareto optimal investment and premium policies and
provide necessary and sufficient conditions for their existence and
uniqueness. We then show that if shareholders cannot credibly commit to an
investment strategy before policies are sold, they pursue an investment
strategy that is either most risky or not risky at all. Last, we specify the
conditions under which solvency regulation, such as Solvency II or the Swiss
Solvency Test, mitigates the inefficiency of the risk shifting problem.

Period	10 Mar 2010 → 11 Mar 2010
Event title	Jahrestagung 2010, Deutscher Verein für Versicherungswissenschaft
Event type	Unknown
Degree of Recognition	International