Effects of Cap-and-Trade Mechanism and Financial Gray Rhino Threats on Insurer Performance

Shi Chen, Fu-Wei Huang and Jyh-Horng Lin
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Shi Chen: School of Economics, Southwestern University of Finance and Economics, Chengdu 610074, China
Fu-Wei Huang: Department of Banking and Finance, CTBC Business School, Tainan City 709, Taiwan
Jyh-Horng Lin: Department of International Business, Tamkang University, New Taipei City 251, Taiwan

Energies, 2022, vol. 15, issue 15, 1-20

Abstract: This paper develops a capped barrier option model to examine how a cap-and-trade mechanism affects an insurer’s guaranteed rate-setting behavior and policyholder protection in a financial gray rhino environment. Toward sustainability, the insurer explicitly captures the credit risk from the borrowing firms, participating in the cap-and-trade scheme to reduce carbon emissions, an essential issue of carbon emission and environmental protection when facing gray rhino threats. In addition, the energy economics and policy analysis are from the fund-providing insurer’s perspective. Green lending policies and life insurance policy loans (i.e., disintermediation related to insurance stability) are crucial to managers and regulators, particularly bridging the borrowing-firm carbon transactions for carbon emission reductions toward sustainability. We show that the shrinking regulatory cap of the cap-and-trade scheme harms policyholder protection, adversely affecting insurance stability. The harm becomes more serious when the gray rhino threat on borrowing firms becomes significant. An increase in policy loans decreases the insurer’s interest margin and policyholder protection. However, increasing the gray rhino threat decreases life insurance policies at a reduced guaranteed rate but increases policyholder protection, contributing to insurance stability. Therefore, the government can use the cap-and-trade scheme to control carbon emissions and improve the environment, but it harms policyholder protection. We suggest that, for example, the government should subsidize the insurer for green lending, affecting insurance stability.

Keywords: cap-and-trade; capped barrier option model; financial gray rhino; policyholder protection; policy loans (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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