A life insurer capped by the borrower's credit risk and COVID-19 outbreak is modeled.
•
The COVID-19 outbreak, hedging, and capital regulation are considered explicitly.
•
The effect of COVID-19 outbreak on borrowing firm deteriorates insurance activities.
•
The COVID-19 outbreak and insurer hedging harm policyholder protection.
•
Stringent regulation reinforces insurance instability during COVID-19 outbreak period.
Abstract
In this paper, we apply the risk-neutral valuation methodology to evaluate a life insurer's equity. We model the features capped by the explicit treatment of the borrowing firm's credit risk, the optimal guaranteed rate-setting, and the coronavirus disease (COVID-19) outbreak. The results show that the severe effect of the COVID-19 epidemic on the borrowing firm harms its insurance business but that stringent capital regulation helps. The severe impact of COVID-19 on both the borrowing firm and the insurer hedging harm policyholder protection, thereby adversely affecting insurance stability.
