The article examines the effect of capital regulation on life insurance policyholder protection. The
acquisition consists of a standard-call narrow insurance proposal for the acquirer and a barrier-cap
synergy insurance proposal for the acquiree. Developing a contingent claim model integrating
these features, we conclude that the acquisition creates value for consolidation. We show that the
policyholder protection is enhanced under a stringent capital regulation when the consolidated
insurer’s leverage is high. The favourable regulatory effect is significant when the premature
default risk of the acquiree is high. Our results also suggest that a stringent capital regulation by
decreasing the acquirer’s leverage decreases the acquisition incentive while decreasing the acquiree’s
leverage increases the motivation. This article discusses the capital regulation effect on insurer
acquisition strategies, which depends on both the acquirer’s and acquiree’s management
structures.
