A contingent claim model of life insurer-bank swap default pricing: strategic substitutes and complements

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Title:	A contingent claim model of life insurer-bank swap default pricing: strategic substitutes and complements
Authors:	Jyh-Horng Lin;Shi Chen;Fu-Wei Huang
Keywords:	Swap transactions;strategic complement;strategic substitute;capital regulation
Date:	2021-07-10
Issue Date:	2021-03-11 12:12:10 (UTC+8)
Publisher:	Routledge
Abstract:	This paper develops a contingent claim framework to examine swap transactions between a life insurer and a bank that bilaterally price default risks. We show that the insurer (the protection buyer in the swap transaction market) regards the optimal bank loan rate as a strategic complement. In contrast, the bank (the protection seller) considers the optimal insurer guaranteed rate as a strategic substitute. Hedging conducted by the insurer enhances profits but hurts policyholder protection. Bank capital regulation harms policyholder protection. Insurer capital regulation leads to bank risk-taking. Capital regulations, as such, would jeopardize insurer-bank performance from a financial stability standpoint.
Relation:	Applied Economics 53(36), p.4166-4177
DOI:	10.1080/00036846.2021.1897077
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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