Robust Investment-Driven Insurance Pricing and Liquidity Management

2026-03-19

AI Summary

This study investigates how insurers jointly optimize underwriting, investment, refinancing, and dividend policies to maximize shareholder value in the presence of model uncertainty and financial frictions. The authors develop the first dynamic equilibrium model of liquidity management that incorporates model uncertainty, characterizing firms’ robust decision-making under their subjectively worst-case scenarios. Key contributions include establishing the existence of equilibrium, uncovering a liquidity-driven underwriting cycle and associated risk-hedging mechanisms, and identifying a counterintuitive phenomenon—negative risk loadings—when insurance risks are positively correlated with financial markets, along with a clear explanation of its underlying mechanism.

Technology Category

• Reasoning under Uncertainty: Stochastic Optimization
• Multiagent Systems: Multiagent Systems under Uncertainty
• Game Theory and Economic Paradigms: Equilibrium

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs
• User Modeling, Personalization and Recommendation: Attacks and countermeasures in recommendation systems

Abstract

This paper develops a dynamic equilibrium model of the insurance market that jointly characterizes insurers' underwriting, investment, recapitalization, and dividend policies under model uncertainty and financial frictions. Competitive insurers maximize shareholder value under a subjective worst-case probability measure, giving rise to liquidity-driven underwriting cycles and flight-to-quality behavior. While an equilibrium typically fails to exist in such dynamic liquidity management framework with external financial investment, we show that incorporating model uncertainty restores equilibrium existence under plausible parameter conditions. Moreover, the model uncovers a novel relationship between the correlation of insurance and financial market risks and the equilibrium insurance price: negative loadings may emerge when insurance gains and financial returns are positively correlated, contrary to conventional intuition.

Problem

• model uncertainty
• insurance pricing
• liquidity management
• financial frictions
• risk correlation

Innovation

• model uncertainty
• dynamic equilibrium
• liquidity management
• insurance pricing
• financial frictions