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This paper develops a contingent claim model of a risk-averse life insurer's equity with various borrowing-firm credit risk features. The insurer's lending function with various financial technology involvements creates the need to model equity as a capped/naked call option in insurer-borrowing firms. As a result, the insurer benefits from the capped-risk lending strategy yielding a higher interest margin. However, either the severe novel coronavirus (COVID-19) pandemic or the substantial risk aversion deteriorates policyholder protection. In addition, stringent insurer capital regulation reduces the insurer's interest margin, thus increasing policyholder protection and contributing to insurance stability but discouraging insurer financial technology involvements. [ABSTRACT FROM AUTHOR]

This paper develops a duopolistic contingent claim model to evaluate the equity values of life insurers during a trade war. Choosing advanced (technology-oriented) relative to backward (human capital-oriented) technology is crucial for insurance management. A result shows that holding more capital would enhance insurer survival. The enhancement becomes more significant when the trade war becomes more severe and when the technology chosen by the insurers is more backward. Capital, as such, contributes to insurance stability but discourages advanced technology development for insurers during the trade war. [ABSTRACT FROM AUTHOR]

This paper examines financial claims for lending if banks are permitted to hold equity in productive firms. We demonstrate that in situations where an oligopolistic product market has relatively high competition, e.g., quasi-competitive behavior, equity holding by banks is likely to do little damage. However, where the product market has relatively high collusion, e.g., corporative behavior, equity holding by banks are very unlikely to hold equity in firms. Our findings provide an alternative argument that lifting the Glass-Steagall Act restricting banks from holding equity in firms should give little cause for concern.

Theories on financial futures hedging are generally based on a portfolio-choice approach. This paper presents an alterative: a firm-theoretic model of bank behavior with financial futures under deposit insurance. Assuming that the bank is a certificate of deposit (CD) rate-setter and faces random CDs, expressions for the optimal futures hedge are derived under the option-based valuation. When the bank is in a bad state of the world, a decrease in the short position of the futures decreases the loan rate and increases the CD rate; an increase in the deposit insurance premium increases the loan rate and decreases the CD rate. We also show that the bank’s amount of futures increases with a lower expected futures interest rate.

This study develops a contingent framework to examine the contract issuance of alternative unit-linked insurance plans (ULIPs) considering policy surrender. We show that the extension of the aggressive/conservative-plan policy surrender date enhances policyholder protection and insurer default risk when the two optimal guaranteed rates of the programs remain fixed. Increasing aggressive-plan policy surrenders improves policyholder protection and insurer survival when the optimal invested-asset interest rate remains unchanged. Increasing conservative-plan policy surrenders negatively impacts policyholder protection but supports insurer survival. Our results complement the literature by demonstrating that ULIPs are relevant to policyholder protection and insurer survival in the asset-liability matching management. [ABSTRACT FROM AUTHOR]

We develop a two-stage contingent claim model to evaluate a life insurer's equity. The model sequentially determines the optimal guaranteed rate and the optimal technology choice for strategic asset-liability matching management. We show that increases in policy loans decrease the insurance businesses at a reduced guaranteed rate. The shrinking life insurance businesses discourage the insurer from using advanced technology. However, we find that an increase in advanced technology involvement enhances insurance businesses at an increased guaranteed rate. An increase in the policy loan also increases the policyholder protection when considering the optimal guaranteed rate and technology choice strategies. [ABSTRACT FROM AUTHOR]