OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE

What is it about?

Regulatory default constraints restrict insurance companies in their contract design. We show that this effect can be mitigated if the regulator implement a traffic light system where companies are forced to reduce the riskiness of their asset allocation in distress.

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Why is it important?

In a utility-based framework, it is beneficial for both the policyholder and the insurance company to reduce riskiness in distress. This result is due to the non-linearity of the payoff of a guarantee contract that implies that an optimal investment strategy is dynamic and not constant-mix.