The 307th Wenlan Financial Forum

Abstract：

This article theoretically analyzes the asset substitution issue regarding insurance decisions between shareholders and creditors. We find that the agency problem between shareholders and creditors is related to the risk level and capital structure of a company. When leverage is at an optimal level, agency problems only exist when the risk is relatively high. This finding explains why insurance provisions in bonds are often tailored to significant risks. Additionally, given a certain risk level, the agency problem regarding insurance decisions between shareholders and creditors exists within a specific leverage ratio range, which aligns with the conclusions of some literature on asset substitution issues involving speculative risk choices.

Finally, this article discusses the impact of additional insurance premiums on a company's optimal insurance decisions. We conclude that when considering additional premiums, the company's optimal risk management strategy will certainly not be full insurance. This result complements the existing literature on the impact of transaction frictions on optimal hedging strategies. Moreover, our analytical framework can also provide explanations for many insurance phenomena in reality.

Speaker Introduction：

Bingqing Li, Professor of Nankai-Taikang Insurance and Actuarial Research Institute at Nankai University and a member of the SOA China Committee, graduated from the Institute of Mathematics at Nankai University with a Doctorate in Science in Combinatorial Mathematics. Her main research interests are insurance economics, asset pricing, credit risk, etc. She is the principal investigator of several national key projects, including "Numerical Methods and Application Research of Path-Dependent Options" (funded by the National Natural Science Foundation of China) and "Research on Embedded Value of Life Insurance Companies" (a major project of the Key Research Base of Humanities and Social Sciences of the Ministry of Education). Her major works include "Research on Embedded Value of Life Insurance Companies", "Insurance Investment", "Investment Science", etc. Her research findings have been published in international top journals such as Management Science and Journal of Risk and Insurance.