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Optimal Investment and Premium Policies Under Risk Shifting and Solvency Regulation

Authors

  • Damir Filipović,

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    • Damir Filipović is at the École Polytechnique Fédérale de Lausanne and Swiss Finance Institute, Quartier UNIL-Dorigny, Extranef 218, CH-1015 Lausanne, Switzerland. Filipović can be contacted via e-mail: damir.filipovic@epfl.ch. Robert Kremslehner is at the Department of Finance, Accounting, and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria. Kremslehner can be contacted via e-mail: robert.kremslehner@wu.ac.at. Alexander Muermann is at the Department of Finance, Accounting, and Statistics, Vienna University of Economics and Business and Vienna Graduate School of Finance, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria. Muermann can be contacted via e-mail: alexander.muermann@wu.ac.at. We thank Keith Crocker, Ole von Häfen, Julien Hugonnier, Christian Laux, Achim Wambach, participants of the 2010 World Risk and Insurance Economics Congress (WRIEC), the conference ”Enterprise Risk Management and Corporate Governance for Insurance Firms” organized by ICFR and EDHEC Business School, and two anonymous referees for helpful comments. We gratefully acknowledge financial support by NCCR (National Centre of Competence in Research) FINRISK of the Swiss National Science Foundation.
  • Robert Kremslehner,

    Search for more papers by this author
    • Damir Filipović is at the École Polytechnique Fédérale de Lausanne and Swiss Finance Institute, Quartier UNIL-Dorigny, Extranef 218, CH-1015 Lausanne, Switzerland. Filipović can be contacted via e-mail: damir.filipovic@epfl.ch. Robert Kremslehner is at the Department of Finance, Accounting, and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria. Kremslehner can be contacted via e-mail: robert.kremslehner@wu.ac.at. Alexander Muermann is at the Department of Finance, Accounting, and Statistics, Vienna University of Economics and Business and Vienna Graduate School of Finance, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria. Muermann can be contacted via e-mail: alexander.muermann@wu.ac.at. We thank Keith Crocker, Ole von Häfen, Julien Hugonnier, Christian Laux, Achim Wambach, participants of the 2010 World Risk and Insurance Economics Congress (WRIEC), the conference ”Enterprise Risk Management and Corporate Governance for Insurance Firms” organized by ICFR and EDHEC Business School, and two anonymous referees for helpful comments. We gratefully acknowledge financial support by NCCR (National Centre of Competence in Research) FINRISK of the Swiss National Science Foundation.
  • Alexander Muermann

    Search for more papers by this author
    • Damir Filipović is at the École Polytechnique Fédérale de Lausanne and Swiss Finance Institute, Quartier UNIL-Dorigny, Extranef 218, CH-1015 Lausanne, Switzerland. Filipović can be contacted via e-mail: damir.filipovic@epfl.ch. Robert Kremslehner is at the Department of Finance, Accounting, and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria. Kremslehner can be contacted via e-mail: robert.kremslehner@wu.ac.at. Alexander Muermann is at the Department of Finance, Accounting, and Statistics, Vienna University of Economics and Business and Vienna Graduate School of Finance, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria. Muermann can be contacted via e-mail: alexander.muermann@wu.ac.at. We thank Keith Crocker, Ole von Häfen, Julien Hugonnier, Christian Laux, Achim Wambach, participants of the 2010 World Risk and Insurance Economics Congress (WRIEC), the conference ”Enterprise Risk Management and Corporate Governance for Insurance Firms” organized by ICFR and EDHEC Business School, and two anonymous referees for helpful comments. We gratefully acknowledge financial support by NCCR (National Centre of Competence in Research) FINRISK of the Swiss National Science Foundation.

Abstract

Limited liability creates an incentive for insurers to increase the risk of the assets and liabilities at the expense of policyholders. We show that solvency capital requirements restrict the set of feasible investment and premium policies and can thereby improve efficiency under the risk-shifting problem. This finding becomes particularly important in light of Solvency II, the forthcoming European risk-based solvency regime for insurers. We provide evidence for Solvency II–related efficiency effects in a calibration study for a nonlife insurer average portfolio.

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