It is essential to examine how carbon trading affects the financial performance of life insurers who offer funding
in a challenging dragon-king environment. The primary focus of this study is to evaluate the effects of
manufacturing-borrower carbon emissions trading on the insurer’s interest margin and insurance stability. To
this end, a capped barrier cap option model is developed to capture the manufacturing borrower credit risk from
green operations, the quality of the dragon-king environment, and the insurer’s equity valuation through
liquidity management with life insurance policy loans. The findings of this study indicate that stricter regulatory
caps increase insurer interest margins but hurt insurance stability. Additionally, green improvements help increase
interest margins but create greater insurance instability. The increase in carbon allowances purchased by
the carbon-intensive borrower for production permission increases the insurer’s interest margins but reduces
insurance instability. These energy policies create insurer profitability and financial instability, causing regulators
to reconsider their energy policies from the perspective of fund providers. Our study contributes to the
green literature by considering that manufacturing borrower cap-and-trade participation affects insurer performance
in a dragon-king environment. The results of this study can inform policymakers and insurers in
developing effective carbon trading strategies to balance profitability and stability in challenging environments.
