Paper: arXiv 2603.18962

Authors: Bingzheng Chen, Jan Dhaene, Chun Liu, Shunzhi Pang

Abstract

This paper develops a dynamic equilibrium model of the insurance market that jointly characterizes insurers’ underwriting, investment, recapitalization, and dividend policies under model uncertainty and financial frictions. Competitive insurers maximize shareholder value under a subjective worst-case probability measure, giving rise to liquidity-driven underwriting cycles and flight-to-quality behavior. While an equilibrium typically fails to exist in such dynamic liquidity management framework with external financial investment, we show that incorporating model uncertainty restores equilibrium existence under plausible parameter conditions. Moreover, the model uncovers a novel relationship between the correlation of insurance and financial market risks and the equilibrium insurance price: negative loadings may emerge when insurance gains and financial returns are positively correlated, contrary to conventional intuition.

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a highly sophisticated dynamic equilibrium model incorporating robust control, ambiguity aversion, and financial frictions. While mathematically rich and highly novel in its theoretical findings regarding equilibrium existence and risk correlation, it lacks empirical backtesting or real-world dataset validation.

Research Flowchart

  flowchart TD
    A[Research Goal: Model dynamic insurance pricing & liquidity under uncertainty & frictions] --> B[Inputs: Insurance loss distributions, Asset return risks, Financial friction parameters]
    B --> C[Methodology: Formulate robust dynamic equilibrium & worst-case measure]
    C --> D[Computational Analysis: Solve joint optimization of underwriting, investment & recapitalization]
    D --> E[Outcome 1: Model uncertainty restores existence of dynamic market equilibrium]
    D --> F[Outcome 2: Liquidity-driven underwriting cycles & flight-to-quality behavior]
    D --> G[Outcome 3: Positive risk correlation can yield negative risk loadings]

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4 of 113 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.