Insurer green financing for a supply chain under cap-and-trade regulation: a capped call contingent claim analysis

doi:10.1057/s41599-024-04033-x

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Title:	Insurer green financing for a supply chain under cap-and-trade regulation: a capped call contingent claim analysis
Authors:	Lin, Jyh-horng
Date:	2024-11-14
Issue Date:	2024-11-20 12:05:19 (UTC+8)
Publisher:	Humanities and Social Sciences Communications
Abstract:	This paper introduces a contingent claim analysis to examine sustainable insurance practices. It investigates how life insurers participate in sustainable lending by financing borrowing firms committed to environmentally friendly practices for cleaner production. We establish a capped call option model, where the capped function explicitly considers credit risks associated with borrowing firms in a supply chain engaged in the cap-and-trade mechanism regulated by environmental policies. Our findings reveal that tightening the cap within the cap-and-trade system and reducing green loans can enhance insurer’s interest margins. Conversely, an escalation in the green input ratio across the supply chain may reduce these margins for the insurer. However, reducing low-margin insurance offerings could jeopardize the stability of insurance. The insurer faces financial challenges while supporting borrowing f irms in their efforts toward carbon reduction and sustainable production. Notably, the substantial impact of climate change fueled by carbon emissions significantly influences the underwriting of life insurance policies related to human health. Policymakers need to navigate these intricacies to establish a careful balance between environmental objectives and the f inancial stability of sustainable insurance.
Relation:	Humanities and Social Sciences Communications 11,　1545
DOI:	10.1057/s41599-024-04033-x
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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