Portfolio selection by mutual insurance companies and optimal participating insurance policies

The specific problem of portfolio selection by insurance companies is addressed in this paper. Assuming risk aversion on capital markets, it is optimal to transfer part of the investment risk to policyholders (participating policies), as done in life insurance. This remark leads to two results. First it implies that underwriting profits should be countercyclic. Second, it allows for riskier investments by the insurer. Indeed, optimal risk transfer increases the risk tolerance of the pool. Regulatory constraints on investment behavior in the insurance industry may then be questioned when participating policies are provided.