Dynamic Investment-Driven Insurance Pricing and Optimal Regulation

Bingzheng Chen, Zongxia Liang and Shunzhi Pang

Papers from arXiv.org

Abstract: This paper analyzes the equilibrium of insurance market in a dynamic setting, focusing on the interaction between insurers' underwriting and investment strategies. Three possible equilibrium outcomes are identified: a positive insurance market, a zero insurance market, and market failure. Our findings reveal why insurers may rationally accept underwriting losses by setting a negative safety loading while relying on investment profits, particularly when there is a negative correlation between insurance gains and financial returns. Additionally, we explore the impact of regulatory frictions, showing that while imposing a cost on investment can enhance social welfare under certain conditions, it may not always be necessary.

Date: 2024-10, Revised 2025-04
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