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

Cited References (37)

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  2. The dynamics of insurance prices (2016)
  3. Understanding the ownership structure of corporate bonds (2023)
  4. Generalized robustness and dynamic pessimism (2020)
  5. Super contact and related optimality conditions (1991)
  6. Insurance pricing in an equilibrium model (2023)
  7. Optimal investment for insurer with jump-diffusion risk process (2005)
  8. Insurers’ Investments and Insurance Prices (2024)
and 29 more
  1. Risk Management and Insurance (2004)
  2. The dynamics of competitive insurance markets (1994)
  3. The determination of fair profits for the property-liability insurance firm (1982)
  4. Robust investment for insurers with correlation ambiguity (2024)
  5. Financial Economics of Insurance (2023)
  6. The cost of financial frictions for life insurers (2015)
  7. The fragility of market risk insurance (2022)
  8. Shadow insurance (2016)
  9. Regulatory limits to risk management (2023)
  10. How do financial constraints affect product pricing? E vidence from weather and life insurance premiums (2022)
  11. Conflicting interests and the effect of fiduciary duty: E vidence from variable annuities (2022)
  12. Insurers as asset managers and systemic risk (2022)
  13. Life insurance convexity (2023)
  14. Aggregate lapsation risk (2024)
  15. A demand system approach to asset pricing (2019)
  16. Investor-driven corporate finance: Evidence from insurance markets (2021)
  17. Optimal investment for an insurer to minimize its probability of ruin (2004)
  18. Robust optimal reinsurance and investment strategies for an AAI with multiple risks (2019)
  19. Robust optimal control for an insurer with reinsurance and investment under H eston’s stochastic volatility model (2013)
  20. Optimal time-consistent investment and reinsurance policies for mean-variance insurers (2011)
  21. Robust equilibrium reinsurance-investment strategy for a mean–variance insurer in a model with jumps (2016)
  22. Dynamic pricing of general insurance in a competitive market (2007)
  23. Pricing general insurance using optimal control theory (2005)
  24. Underwriting strategy in a competitive insurance environment (1986)
  25. Equilibrium pricing of general insurance policies (2012)
  26. Insurance with multiple insurers: A game-theoretic approach (2018)
  27. A dynamic pricing game for general insurance market (2021)
  28. The Supply of Insurance (2021)
  29. Alpha-maxmin mean-variance reinsurance-investment strategy under negative risk dependence between two markets (2025)

0 of 37 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.