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 optimizations . We show that regulatory VaR constraints for participating insurance contracts lead to more prudent investment than the unconstrained solution in loss states . This result is contrary to the situation where the insurer maximizes the utility of the total wealth of the company (without distinguishing between equity and policy holders ), in which case a VaR constraint may induce the insurer to take excessive risk leading to higher losses than in the case of no regulation, see Basak and Shapiro (2001). Furthermore, importantly for regulator 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 .
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 .
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optimizations
optimization problems
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the unconstrained solution in loss states
in the case of no regulation
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equity and policy holders
contributions of equity holders and policyholders
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risk
risks
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regulator
regulators