Abstract:

Throughout the business cycle, as circumstances change and opportunities arise, insurers need to reassess in the interest of shareholders, what fraction of equity and premium payments to invest in risky assets, that at the same time retains policyholders. We connect a model for this risk shifting, to one for premium pricing, creating a holistic economic model of the insurance business.

We give an algorithm implementing this 'weather vane' model, based on an insurer's outlook for investing, premium pricing and underwriting, to directionally indicate prospective ways to profitably balance shareholder and policyholder interests.