Capped borrower credit risk and insurer hedging during the COVID-19 outbreak

Shi Chen, Yang Yang and Jyh-Horng Lin

Finance Research Letters, 2020, vol. 36, issue C

Abstract: In this paper, we apply the risk-neutral valuation methodology to evaluate a life insurer's equity. We model the features capped by the explicit treatment of the borrowing firm's credit risk, the optimal guaranteed rate-setting, and the coronavirus disease (COVID-19) outbreak. The results show that the severe effect of the COVID-19 epidemic on the borrowing firm harms its insurance business but that stringent capital regulation helps. The severe impact of COVID-19 on both the borrowing firm and the insurer hedging harm policyholder protection, thereby adversely affecting insurance stability.

Keywords: COVID-19; Capped barrier; Hedging; Policyholder protection; Capital regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:36:y:2020:i:c:s1544612320308308

DOI: 10.1016/j.frl.2020.101744

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