A simple model of financial grey rhino under insurer capital regulation: an extension

ABSTRACT

A recent study proposes a contingent claim model of financial grey rhino under capital regulation and suggests that stringent capital regulation enhances the insurer’s survival, thereby contributing to insurance stability. This note critically evaluates the relevant study’s objective setting and refines the comparative statics by developing a contingent claim utility model. We show that stringent capital regulation helps policyholder protections, but at the expense of the insurer’s equity return, thus adversely affecting insurer survival.

KEYWORDS:

• Financial grey rhino
• absolute risk aversion
• optimal guaranteed rate
• insurer capital regulation

JEL CLASSIFICATION:

• G21
• G28

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For the specifications of $DOC(\kappa ,\nu )$ and $DOC((1-\alpha )\kappa ,\nu )$, see Appendix A.

² For the numerical value assumptions, see Appendix B.

³ Li, Lin, and Lin (2020) conclude stringent capital regulation increases the optimal-guaranteed rate, considering board utility and the coronavirus outbreak.

⁴ Lin et al. (2020) model the linkage between insurer spread behaviour and credit swap transaction under capital regulation and conclude stringent capital regulation protecting policyholder.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China under Grant 71603217 (Shi Chen).