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Optimal investment for participating insurance contracts under VaR-Regulation

Thai Nguyen and Mitja Stadje

Papers from arXiv.org

Abstract: This paper studies a VaR-regulated optimal portfolio problem of the equity holder of a participating life insurance contract. In a complete market setting the optimal solution is given explicitly for contracts with mortality risk using a martingale approach for constrained non-concave optimization problems. We show that regulatory VaR constraints for participating insurance contracts lead to more prudent investment than in the case of no regulation. This result is contrary to the situation where the insurer maximizes the utility of the total wealth of the company (without distinguishing between contributions of equity holders and policyholders), in which case a VaR constraint may induce the insurer to take excessive risks leading to higher losses than in the case of no regulation, see Basak and Shapiro (2001). Furthermore, importantly for regulators we observe that for participating insurance contracts both relatively small or relatively large policyholder contributions yield rather risky and volatile strategies. Finally, we also discuss the regulatory effect of a portfolio insurance (PI), and analyze different choices for the parameters of the participating contract numerically .

New Economics Papers: this item is included in nep-cta, nep-ias, nep-knm, nep-rmg and nep-upt
Date: 2018-05, Revised 2018-05
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