Opportunity Cost in Insurance

Abstract

We develop a formalism for insurance profit optimisation for the in-force business constraint by regulatory and risk policy related requirements. This approach is applicable to Life, P&C and Reinsurance businesses and applies in all regulatory frameworks with a solvency requirement defined in the form of a solvency ratio, notably Solvency II and the Swiss Solvency Test. We identify the optimal asset allocation for profit maximisation within a pre-defined risk appetite and deduce the annual opportunity cost faced by the insurance company.