Evaluating the Efficiency of Capital Enhancement and Investment Constraints in Life Insurance Supervision

Abstract

Abstract This study addresses the critical public concern of effectively mitigating solvency risks in insurance companies through supervisory intervention. Building upon existing research, we extend our analysis to incorporate the effects of foreign investment and examine the impact of varying degrees of risk aversion among insurers. Furthermore, we investigate the optimal expected terminal utility in relation to initial insurance company premiums, integrating interest and exchange rates into our analytical framework. Additionally, we evaluate the impact of regulatory interventions, specifically capital injection schemes and risk-constrained asset allocation, on insurers’ default risk and certainty equivalent wealth using a utility-based approach. Our findings indicate that: (1) when policyholders exhibit higher degrees of risk aversion, a reduced propensity to allocate funds to riskier assets, such as stock index funds and foreign assets, is observed; (2) when exchange rates offer higher returns, an increased allocation to foreign assets is advisable; (3) conversely, when exchange rate returns exhibit greater uncertainty, a reduction in foreign asset allocation is recommended; (4) in scenarios where foreign risk-free rates yield higher returns, an increased allocation to foreign assets is suggested; and (5) under conditions of capital minimization, the influence of exchange rates and foreign interest rates on optimization becomes less discernible.