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Optimal Investment and Premium Policies Under Risk Shifting and Solvency Regulation
Author(s) -
Filipović Damir,
Kremslehner Robert,
Muermann Alexander
Publication year - 2015
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12021
Subject(s) - solvency , solvency ratio , capital requirement , portfolio , business , liability , investment (military) , incentive , actuarial science , risk premium , capital (architecture) , economics , finance , monetary economics , microeconomics , market liquidity , politics , law , archaeology , history , political science
A bstract Limited liability creates an incentive for insurers to increase the risk of the assets and liabilities at the expense of policyholders. We show that solvency capital requirements restrict the set of feasible investment and premium policies and can thereby improve efficiency under the risk‐shifting problem. This finding becomes particularly important in light of Solvency II, the forthcoming European risk‐based solvency regime for insurers. We provide evidence for Solvency II–related efficiency effects in a calibration study for a nonlife insurer average portfolio.