Energy transition: Cap-and-trade and carbon capture and storage for achieving net-zero emissions with sustainable insurance.

This paper introduces an energy transition model featuring a carbon-intensive manufacturer that adopts sustainable insurance, participates in a cap-and-trade scheme, and implements carbon capture and storage (CCS) transit, all aimed at achieving the net-zero carbon emission target. The model utilizes a down-and-out call (DOC) approach to evaluate the manufacturer's equity, considering the bankruptcy risk prior to maturity due to carbon intensity. The equity of the life insurer providing funds is assessed using a capped DOC method to address the capped credit risk from the manufacturer. The findings reveal that increased adoption of CCS transit diminishes manufacturer equity, heightens default risk, and reduces insurer equity, with these effects exacerbated by advanced CCS technology and stringent cap-and-trade caps. Both stringent cap-and-trade schemes and rapid advancements in CCS transit practices, particularly with the use of advanced CCS technology, deviate from the net-zero target. A critical policy implication is the necessity for the precise calibration of cap-and-trade schemes and the pace of CCS transit adoption to ensure alignment with net-zero targets.

COVID-19, insurer board utility, and capital regulation.

This paper develops a down-and-out call option model by introducing a structural break in volatility to capture the coronavirus (COVID-19) outbreak. The life insurer's equity and its board's utility are evaluated at the optimal guaranteed rate in the equity maximization. Results suggest that the seriousness degree of the COVID-19 outbreak and capital regulation enhance the optimal guaranteed rate and the board's utility. Increased the board's utility by increasing liabilities costs insurer profitability. Conflicts of incentives can arise during the COVID-19 outbreak.

Capped borrower credit risk and insurer hedging during the COVID-19 outbreak.

In this paper, we apply the risk-neutral valuation methodology to evaluate a life insurer's equity. We model the features capped by the explicit treatment of the borrowing firm's credit risk, the optimal guaranteed rate-setting, and the coronavirus disease (COVID-19) outbreak. The results show that the severe effect of the COVID-19 epidemic on the borrowing firm harms its insurance business but that stringent capital regulation helps. The severe impact of COVID-19 on both the borrowing firm and the insurer hedging harm policyholder protection, thereby adversely affecting insurance stability.

Balancing equity and policyholder protection: Assessing insurer's interests in green lending under cap-and-trade regulations.

This paper presents a contingent claim model designed to assess an insurer's equity within the framework of carbon trading regulations imposed on borrowing firms while also considering the integration of green lending. The development of this model is particularly relevant for regions with established carbon trading markets, with a specific focus on the post-period following the 2015 Paris Agreement concerning climate change. We focus on shareholders and policyholders to optimize equity and ensure maximum protection. Strict caps in cap-and-trade harm interest margins, reducing guaranteed rates for equity maximization and compromising policyholder protection. Government intervention through sustainable production carbon trading hinders win-win outcomes. Green subsidies can improve insurer margins, but achieving win-win solutions remains challenging. A collective approach is needed to share sustainable production and finance benefits among diverse economic sectors.