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arXiv · 2504.12851

Optimal Capital Structure for Life Insurance Companies Offering Surplus Participation

Felix Fießinger·Mitja Stadje
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Abstract

This manuscript develops a dynamic capital structure model of life insurance companies offering participating contracts. Specifically, we explain why life insurers offer guaranteed payments either with or without policyholder surplus participation and derive conditions under which participating features are endogenously preferred. We show that surplus participation helps mitigate the asset substitution effect but is not always optimal. Depending on the tax rate and the recovery rate in bankruptcy, the insurer may optimally choose a non-participating contract.

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Felix Fießinger, Mitja Stadje. 2025-04-17. Optimal Capital Structure for Life Insurance Companies Offering Surplus Participation. https://arxiv.org/abs/2504.12851

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