Optimal Investment and Premium Policies under Risk Shifting and Solvency Regulation

Limited liability creates a conict of interests between policyholders and shareholders ofinsurance companies. It provides shareholders with incentives to increase the risk of theinsurer's assets and liabilities which, in turn, might reduce the value policyholders attach toand premiums they are willing to pay for insurance coverage.We characterize Pareto optimal investment and premium policies in this context and pro-vide necessary and sufficient conditions for their existence and uniqueness. We then identifyinvestment and premium policies under the risk shifting problem if shareholders cannot cred-ibly commit to an investment strategy before policies are sold and premiums are paid. Last,we analyze the eect of solvency regulation, such as Solvency II or the Swiss Solvency Test,on the agency cost of the risk shifting problem and calibrate our model to a non-life insureraverage portfolio.[...]