Dynamic Investment-Driven Insurance Pricing and Optimal Regulation

ArXiv ID: 2410.18432 “View on arXiv”

Authors: Unknown

Abstract

This paper analyzes the equilibrium of insurance market in a dynamic setting, focusing on the interaction between insurers’ underwriting and investment strategies. Three possible equilibrium outcomes are identified: a positive insurance market, a zero insurance market, and market failure. Our findings reveal why insurers may rationally accept underwriting losses by setting a negative safety loading while relying on investment profits, particularly when there is a negative correlation between insurance gains and financial returns. Additionally, we explore the impact of regulatory frictions, showing that while imposing a cost on investment can enhance social welfare under certain conditions, it may not always be necessary.

Keywords: Insurance Market Equilibrium, Underwriting Strategy, Investment Strategy, Regulatory Frictions, Dynamic Programming, Insurance

Complexity vs Empirical Score

• Math Complexity: 8.0/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats
• Why: The paper employs advanced stochastic control and dynamic equilibrium modeling with heavy mathematical derivations, but lacks any mention of backtesting, datasets, or statistical implementation details.

  flowchart TD
    A["Research Goal: Analyze dynamic insurance market equilibrium"]
    B["Methodology: Dynamic Programming & Equilibrium Analysis"]
    C["Data/Inputs: Insurance gains & financial returns correlation"]
    D["Computation: Solving for underwriting & investment strategies"]
    E["Outcome 1: Positive Insurance Market (Profitable)"]
    F["Outcome 2: Zero Insurance Market (Break-even)"]
    G["Outcome 3: Market Failure"]
    
    A --> B
    B --> C
    C --> D
    D --> E
    D --> F
    D --> G