Optimal investment strategies for insurance companies when capital requirements are imposed by a standard formula
- The Solvency II standard formula employs an approximate Value-at-Risk approach to define risk-based capital requirements. This paper investigates how the standard formula’s stock risk calibration influences the equity position and investment strategy of a shareholder-value-maximizing insurer with limited liability. The capital requirement for stock risks is determined by multiplying a regulation-defined stock risk parameter by the value of the insurer’s stock portfolio. Intuitively, a higher stock risk parameter should reduce risky investments as well as insolvency risk. However, we find that the default probability does not necessarily decrease when reducing the investment risk (by increasing the stock investment risk parameter). We also find that depending on the precise interaction between assets and liabilities, some insurers will invest conservatively, whereas others will prefer a very risky investment strategy, and a slight change of the stock risk parameter may lead from a conservative to a high risk asset allocation.
Author: | Katharina FischerGND, Sebastian SchlütterGND |
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URN: | urn:nbn:de:hebis:30:3-769954 |
Series (Serial Number): | ICIR Working Paper Series (No. 9/12 [04.2014]) |
Publisher: | International Center for Insurance Regulation |
Place of publication: | Frankfurt am Main |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2014 |
Year of first Publication: | 2014 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2024/03/28 |
Tag: | Asset Allocation; Insurer Default Risk; Regulation Capital Requirements; Solvency |
Edition: | Version April 2014 |
Page Number: | 32 |
HeBIS-PPN: | 517269058 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |