Responsible investments in life insurers' optimal portfolios under solvency constraints

  • Socially responsible investing (SRI) continues to gain momentum in the financial market space for various reasons, starting with the looming effect of climate change and the drive toward a net-zero economy. Existing SRI approaches have included environmental, social, and governance (ESG) criteria as a further dimension to portfolio selection, but these approaches focus on classical investors and do not account for specific aspects of insurance companies. In this paper, we consider the stock selection problem of life insurance companies. In addition to stock risk, our model set-up includes other important market risk categories of insurers, namely interest rate risk and credit risk. In line with common standards in insurance solvency regulation, such as Solvency II, we measure risk using the solvency ratio, i.e. the ratio of the insurer’s market-based equity capital to the Value-at-Risk of all modeled risk categories. As a consequence, we employ a modification of Markowitz’s Portfolio Selection Theory by choosing the “solvency ratio” as a downside risk measure to obtain a feasible set of optimal portfolios in a three-dimensional (risk, return, and ESG) capital allocation plane. We find that for a given solvency ratio, stock portfolios with a moderate ESG level can lead to a higher expected return than those with a low ESG level. A highly ambitious ESG level, however, reduces the expected return. Because of the specific nature of a life insurer’s business model, the impact of the ESG level on the expected return of life insurers can substantially differ from the corresponding impact for classical investors.

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Author:Sebastian SchlütterGND, Emmanuel Senyo FianuGND, Helmut GründlGND
URN:urn:nbn:de:hebis:30:3-771646
Series (Serial Number):ICIR Working Paper Series (45/2022 [14.6.22])
Publisher:International Center for Insurance Regulation
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2024/04/11
Tag:Life insurance companies; Portfolio optimization; Socially responsible investments; Solvency regulation
Edition:Version: 14 June 2022
Page Number:41
HeBIS-PPN:517598639
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:G Financial Economics / G1 General Financial Markets / G11 Portfolio Choice; Investment Decisions
G Financial Economics / G2 Financial Institutions and Services / G22 Insurance; Insurance Companies
G Financial Economics / G3 Corporate Finance and Governance / G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht