Opportunity Cost in Insurance

TL;DR

This paper presents a formal framework for optimizing insurance profits by identifying optimal asset allocations under regulatory constraints, applicable across various insurance sectors and regulatory regimes.

Contribution

It introduces a novel formalism for profit optimization considering regulatory and risk policies, applicable to multiple insurance types and frameworks.

Findings

Identifies optimal asset allocation for profit maximization.

Quantifies the annual opportunity cost faced by insurers.

Applicable to Solvency II and Swiss Solvency Test regimes.

Abstract

We develop a formalism for insurance profit optimisation for the in-force business constraint by regulatory and risk policy related requirements. This approach is applicable to Life, P&C and Reinsurance businesses and applies in all regulatory frameworks with a solvency requirement defined in the form of a solvency ratio, notably Solvency II and the Swiss Solvency Test. We identify the optimal asset allocation for profit maximisation within a pre-defined risk appetite and deduce the annual opportunity cost faced by the insurance company.