Robust Investment-Driven Insurance Pricing under Correlation Ambiguity

TL;DR

This paper investigates how insurers can set prices and strategies under uncertainty about the correlation between insurance and financial risks, revealing that ambiguity can lead to multiple equilibrium regimes without necessarily increasing prices.

Contribution

It introduces a model for dynamic equilibrium insurance pricing considering correlation ambiguity and analyzes its effects on strategies and equilibrium regimes.

Findings

Correlation ambiguity can generate multiple equilibrium regimes.

Ambiguity does not necessarily increase insurance prices.

Insurers' utility may not decrease under correlation ambiguity.

Abstract

As insurers increasingly behave like financial intermediaries and actively participate in capital markets, understanding the dependence structure between insurance and financial risks becomes crucial for insurers' operations. This paper studies dynamic equilibrium insurance pricing when insurers face ambiguity about the correlation between insurance and financial risks and optimally choose underwriting and investment strategies under worst-case beliefs. Correlation ambiguity can generate multiple equilibrium regimes. Contrary to conventional intuition, we find ambiguity does not necessarily increase insurance prices nor reduce insurers' utility.