Abstract
A Model is proposed for an insurance company which allows for a simultaneous optimization of the leverage and of the asset allocation of the firm. An explicit solution is derived. The optimal gearing of the company is typically below the values observed in practice. It is shown that the optimal choice of equity to debt ratio and of asset mix is driven by the same risk willingness of the company. If the leverage is constrained by regulatory considerations the firm may improve its overall utility by increasing the share of its risky assets. Too high a share of risky assets leads to non optimal solutions and highly volatile returns. The problem is compounded by a high leverage.
Keywords: Capital allocation, asset allocation, leverage, gearing, risk willingness, insurance regulation.
Volume
Berlin
Year
2003
Categories
Actuarial Applications and Methodologies
Capital Management
Capital Allocation
Publications
ASTIN Colloquium
