COVID-19, insurer board utility, and capital regulation

Xuelian Li; Panpan Lin; Jyh-Horng Lin

doi:10.1016/j.frl.2020.101659

COVID-19, insurer board utility, and capital regulation

Financ Res Lett. 2020 Oct:36:101659. doi: 10.1016/j.frl.2020.101659. Epub 2020 Jun 18.

Authors

Xuelian Li¹, Panpan Lin², Jyh-Horng Lin³

Affiliations

¹ School of Economics, Southwestern University of Finance and Economics, Collaborative Innovation Center of Financial Security, Chengdu 611130, China.
² School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China.
³ Department of International Business, Tamkang University, New Taipei City, Taiwan.

Abstract

This paper develops a down-and-out call option model by introducing a structural break in volatility to capture the coronavirus (COVID-19) outbreak. The life insurer's equity and its board's utility are evaluated at the optimal guaranteed rate in the equity maximization. Results suggest that the seriousness degree of the COVID-19 outbreak and capital regulation enhance the optimal guaranteed rate and the board's utility. Increased the board's utility by increasing liabilities costs insurer profitability. Conflicts of incentives can arise during the COVID-19 outbreak.

Keywords: Board utility; COVID-19; Capital regulation; Optimal guaranteed rate.