Capital reserve policy, regulation and credibility in insurance

Renaud Bourlès (1, 2) , Dominique Henriet (1)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
2 UT Capitole - Université Toulouse Capitole

The aim of this paper is to analyze the need for capital and default regulation in insurance. Proponents of deregulation argue that these requirements are useless as insurers would hold enough capital as soon as the insured are fully informed about their default probability. Adding to the purpose the relationship between an insurer and her security holders (that is the issuance and dividend policy) we show that the second best capital reserve decided by the security holders is suboptimal whenever the return on cash inside the firm is smaller than outside. Because of limited commitment on recapitalization, disclosure of information may not be enough. Given these characteristics, State commitment to recapitalize could be an alternative regulation policy.

Mots clés: insurance; capital reserve; regulation; recapitalization

Domaines: Economies et finances

Renaud Bourlès, Dominique Henriet. Capital reserve policy, regulation and credibility in insurance. 2009. ⟨halshs-00386453⟩