Quotation Filipovic, Damir, Kremslehner, Robert, Mürmann, Alexander. 2010. Optimal Investment and Premium Policies under Risk Shifting and Solvency Regulation. Workshop Financial Markets & Risk, Obergurgl, Österreich, 08.04.-10.04..




Risk shifting is a well-known agency problem in corporate finance which also exists between policyholders and shareholders of insurance companies. Shareholders engage in excessive risk taking at the expense of policyholders who, in turn, are less willing to pay for insurance coverage. Solvency regulation addresses this incentive problem by restricting the set of investment strategies and premium policies. We first characterize Pareto optimal investment and premium policies and provide necessary and sufficient conditions for their existence and uniqueness. We then show that if shareholders cannot credibly commit to an investment strategy before policies are sold, they pursue an investment strategy that is either most risky or not risky at all. Last, we specify the conditions under which solvency regulation, such as Solvency II or the Swiss Solvency Test, mitigates the inefficiency of the risk shifting problem.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title Optimal Investment and Premium Policies under Risk Shifting and Solvency Regulation
Event Workshop Financial Markets & Risk
Year 2010
Date 08.04.-10.04.
Country Austria
Location Obergurgl


Filipovic, Damir (Former researcher)
Kremslehner, Robert (Former researcher)
Mürmann, Alexander (Details)
Institute for Finance, Banking and Insurance IN (Details)
Vienna Institute of Finance IN (Former organization)
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