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Optimizing an Insurance Company's Portfolio with a Consideration of the RBC constraint

  • Journal of Insurance and Finance
  • 2014, 25(2), pp.3-32
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Changhui Choi 1

1보험연구원

Accredited

ABSTRACT

This paper presents a mathematical formulation of a portfolio optimization problem that maximizes an insurance company's mean-variance utility function subject to the RBC requirement constraint, explaining how its optimal solution can be obtained. In addition, this research investigates how the changes in critical factors(such as risk-aversion factor, RBC requirement level and insurance company's capital level) influence the insurance company's optimal portfolio and investment profitability. Test results of this paper can be summarized as the following. First, increasing the RBC ratio significantly reduces the profitability of an insurer. Second, maintaining superfluous amount of capital within an insurance company can cause the investment-wise inefficiency. Third, it is possible that an insurance company can reduce its portfolio's volatility, while maintaining profitability by rebalancing its portfolio.

Citation status

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