Insurer green finance under regulatory cap-and-trade mechanism associated with green/polluting production during a war

Abstract

The cap-and-trade mechanism affects firms’ production and operation decisions and carbon emissions, making them move towards environmental sustainability. This article develops a contingent claims model to examine the impact of the regulatory cap-and-trade mechanism on the green finance strategy of an insurer during a war. Participating in the cap-and-trade scheme of the insurer that funds the borrowing firms also implicitly affects firm production and carbon emissions. The results show that increasing the green loans decreases the interest margin of the insurer but helps policyholder protection. The insurer is reluctant to provide green loans for the green borrowing firm and thus retards sustainable development. A stringent regulatory cap of the cap-and-trade mechanism raises the insurer’s interest margin but hurts policyholder protection. From the perspective of the insurer’s profit, regulatory cap efficiently derives insurer lending toward sustainability through borrowing-firm cleaner production. An increased war impacting the polluting borrowing firm increases the insurer’s interest margin but harms policyholder protection, affecting insurance stability adversely. This research enriches related literature and knowledge concerning insurer green finance practices indirectly associated with cleaner production. The research also highlights the significance of the regulatory cap-and-trade mechanism that reflects cleaner production in affecting insurer performance during a war.