Paper: arXiv 2410.18432

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.

Complexity vs Empirical Score

  • Math Complexity: 8.0/10
  • Empirical Rigor: 2.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: 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.

Research Flowchart

  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