Portfolio optimization of euro-denominated funds in French life insurance

In this paper, we study a portfolio optimization problem related to the asset management of life insurance companies. In a persistent low-interest-rate environment, the conditions under which the life insurance business operates are modified. To continue to offer a favorable return to the insured, life insurers should allocate more risky assets to their portfolio. But, doing so, they would be exposed to not being able to guarantee the capital. Besides, the maturity of the life insurance market creates potential conditions for massive withdrawals. We address those risk exposures by applying ruin models. We obtain formulae for the first two moments of the value of a life insurance company, depending on its activity and investment strategy. We show that the optimal asset allocation strategies can differ considerably for small changes in certain parameters of the insurer's business: the probability of insolvency, the level of guaranteed capital, and the premium rate.