Tripartite evolutionary game and simulation of solvency supervision under C‐ROSS II based on prospect theory

Abstract

This paper focuses on the implementation of “C‐ROSS II” and utilizes an evolutionary game model to investigate regulatory issues. Based on prospect theory, a three‐party evolutionary game model is constructed among regulatory agencies, insurance companies, and consumers with incomplete rationality, examining evolutionary stability strategies. Meanwhile, considering the different attitudes of policyholders in the face of loss and return, the heterogeneous risk preference is analyzed by changing the prospect parameters. The results show that increases in penalty amounts, positive incentives, and consumer sensitivity to losses will promote the evolution of the system to the optimal stable equilibrium point. However, rises in brand incomes and rectification costs, as well as decreases in capital costs, will decrease the probability of regulatory authorities enforcing strict supervision.