Insurer acquisition in a narrow-synergy structure and policyholder protection under capital regulation

Abstract

ABSTRACT The article examines the effect of capital regulation on life insurance policyholder protection. The acquisition consists of a standard-call narrow insurance proposal for the acquirer and a barrier-cap synergy insurance proposal for the acquiree. Developing a contingent claim model integrating these features, we conclude that the acquisition creates value for consolidation. We show that the policyholder protection is enhanced under a stringent capital regulation when the consolidated insurer’s leverage is high. The favourable regulatory effect is significant when the premature default risk of the acquiree is high. Our results also suggest that a stringent capital regulation by decreasing the acquirer’s leverage decreases the acquisition incentive while decreasing the acquiree’s leverage increases the motivation. This article discusses the capital regulation effect on insurer acquisition strategies, which depends on both the acquirer’s and acquiree’s management structures.