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A contingent claim model of life insurer-bank swap default pricing: strategic substitutes and complements

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  • Jyh-Horng Lin
  • Shi Chen
  • Fu-Wei Huang

Abstract

This paper develops a contingent claim framework to examine swap transactions between a life insurer and a bank that bilaterally price default risks. We show that the insurer (the protection buyer in the swap transaction market) regards the optimal bank loan rate as a strategic complement. In contrast, the bank (the protection seller) considers the optimal insurer guaranteed rate as a strategic substitute. Hedging conducted by the insurer enhances profits but hurts policyholder protection. Bank capital regulation harms policyholder protection. Insurer capital regulation leads to bank risk-taking. Capital regulations, as such, would jeopardize insurer-bank performance from a financial stability standpoint.

Suggested Citation

  • Jyh-Horng Lin & Shi Chen & Fu-Wei Huang, 2021. "A contingent claim model of life insurer-bank swap default pricing: strategic substitutes and complements," Applied Economics, Taylor & Francis Journals, vol. 53(36), pages 4166-4177, August.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:36:p:4166-4177
    DOI: 10.1080/00036846.2021.1897077
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