Borrowing-firm environmental impact on insurer green finance assessment: Green loan subsidy, regulatory cap, and green technology

Abstract

This study assesses the impact of the green loan subsidy, regulatory cap of the cap-and-trade mechanism, and green technology employment on an insurers green finance decisions and insurance stability. The willingness to provide green insurer finance depends on the borrowing firm's environmental sustainability practices. Toward this end, we develop a contingent claim option model, explicitly capping the credit risk from borrowing-firm greenness to evaluate the insurer's equity and policyholder protection. The lending function of the insurer creates the assessment required to model equity as a cap-call option. We demonstrate that increasing government loan subsidies hurt the insurer's interest margin and policyholder protection. The stringent cap on the cap-and-trade mechanism helps the insurer's interest margin and stability. Increasing the polluting-firm green technology improvement increases the insurer's interest margin and stability, contributing to insurance stability. Our results demonstrate that the insurer's green finance with government loan subsidies for borrowing firm cleaner production toward environmental sustainability may have limited applicability.