Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-23T22:29:16.690Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION

Published online by Cambridge University Press:  16 May 2016

An Chen  and
Peter Hieber
An Chen
Affiliation:
Institute of Insurance Science, University of Ulm, Helmholtzstr. 20, 89069 Ulm, Germany E-Mail: [email protected]
Peter Hieber*
Affiliation:
Institute of Insurance Science, University of Ulm, Helmholtzstr. 20, 89069 Ulm, Germany
*
E-Mail: [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

In a typical equity-linked life insurance contract, the insurance company is entitled to a share of return surpluses as compensation for the return guarantee granted to the policyholders. The set of possible contract terms might, however, be restricted by a regulatory default constraint — a fact that can force the two parties to initiate sub-optimal insurance contracts. We show that this effect can be mitigated if regulatory policy is more flexible. We suggest that the regulator implement a traffic light system where companies are forced to reduce the riskiness of their asset allocation in distress. In a utility-based framework, we show that the introduction of such a system can increase the benefits of the policyholder without deteriorating the benefits of the insurance company. At the same time, default probabilities (and thus solvency capital requirements) can be reduced.

Keywords

Regulationlife insurancedefault riskutility maximizationrisk sharingmultiobjective optimization
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 46 , Issue 3 , September 2016 , pp. 605 - 626
Copyright
Copyright © Astin Bulletin 2016 

References

Bauer, D., Kiesel, R., Kling, A. and Ruß, J. (2005) Risk neutral valuation of participating life insurance contracts. Insurance: Mathematics & Economics, 39 (2), 171–183.Google Scholar
Black, F. and Cox, J.C. (1976) Valuing corporate securities: Some effects of bond indenture provisions. Journal of Finance, 31 (2), 351–367.Google Scholar
Bohnert, A., Gatzert, N. and Jørgensen, P. (2015) On the management of life insurance company risk by strategic choice of product mix, investment strategy and surplus appropriation schemes. Insurance: Mathematics & Economics, 60, 83–97.Google Scholar
Brennan, M.J. and Schwartz, E.S. (1976) The pricing of equity-linked life insurance policies with an asset value guarantee. Journal of Financial Economics, 3 (3), 195–213.CrossRefGoogle Scholar
Chen, A. and Suchanecki, M. (2007) Default risk, bankruptcy procedures and the market value of life insurance liabilities. Insurance: Mathematics and Economics, 40, 231–255.Google Scholar
Dong, M., Gründl, H. and Schlütter, S. (2015) Is the risk-based meachanism always better? The risk-shifting behavior of insurers under different guarantee schemes. Journal of Insurance Issues, 38 (1), 72–95.Google Scholar
Døskeland, T.M. and Nordahl, H.A. (2008) Optimal pension insurance design. Journal of Banking & Finance, 32, 382–392.Google Scholar
European Parliament. (2014) Solvency II directive: Directive 2014/51/EU of the European Parliament and of the Council. Official Journal of the European Union, https://eiopa.europa.eu/regulation-supervision/insurance/solvency-ii.Google Scholar
Filipović, D., Kremslehner, R. and Muermann, A. (2015) Optimal investment and premium policies under risk shifting and solvency regulation. Journal of Risk and Insurance, 82 (2), 261–288.CrossRefGoogle Scholar
Folks, J.L. and Chhikara, R.S. (1978) The inverse Gaussian distribution and its statistical application – a review. Journal of the Royal Statistical Society. Series B, 40 (3), 263–289.Google Scholar
Gatzert, N. and Schmeiser, H. (2008) Combining fair pricing and capital requirements for non-life insurance companies. Journal of Banking & Finance, 32 (12), 2589–2596.Google Scholar
Graf, S., Kling, A. and Ruß, J. (2011) Risk analysis and valuation of life insurance contracts: combining actuarial and financial approaches. Insurance: Mathematics & Economics, 49 (10), 115–125.Google Scholar
Graf, S., Kling, A. and Ruß, J. (2012) Financial planning and risk-return profiles. European Actuarial Journal 2, 77–104.Google Scholar
Grosen, J. and Jørgensen, P.L. (2002) Life insurance liabilities at market value: An analysis of insolvency risk, bonus policy, and regulatory intervention rules in a barrier option framework. Journal of Risk and Insurance, 69 (1), 63–91.Google Scholar
He, H., Keirstead, W. and Rebholz, J. (1998) Double lookbacks. Mathematical Finance, 8 (3), 201–228.Google Scholar
Hieber, P., Korn, R. and Scherer, M. (2015) Analyzing the effect of low interest rates on the surplus participation of life insurance policies with different annual interest rate guarantees. European Actuarial Journal, 5 (1), 11–28.Google Scholar
Jørgensen, P.L. (2007) Traffic light options. Journal of Banking & Finance, 31, 3698–3719.Google Scholar
MacMinn, R.D. and Witt, R.C. (1987) A financial theory of the insurance firm under uncertainty and regulatory constraints. Geneva Papers on Risk and Insurance, 12 (42), 3–20.Google Scholar
McCabe, G.M. and Witt, R.C. (1980) Insurance pricing and regulation under uncertainty: A chance-constrained approach. Journal of Risk and Insurance, 47 (4), 607–635.Google Scholar
Mohan, N. and Zhang, T. (2014) An analysis of risk-taking behavior for public defined benefit plans. Journal of Banking & Finance, 40, 403–419.CrossRefGoogle Scholar
Pézier, J. and Scheller, J. (2013) Best portfolio insurance for long-term investment strategies in realistic conditions. Insurance: Mathematics & Economics, 52, 263–274.Google Scholar
Rauh, J.D. (2009) Risk shifting versus risk management: Investment policy in corporate pension plans. Review of Financial Studies, 22 (7), 2687–2733.Google Scholar
Rees, R., Gravelle, H. and Wambach, A. (1999) Regulation of insurance markets. Geneva Papers on Risk and Insurance Theory, 24, 55–68.Google Scholar
Schlütter, S. (2014) Capital requirements or pricing constraints? An economic analysis of measures for insurance regulation. Journal of Risk Finance, 15 (5), 533–554.CrossRefGoogle Scholar
Schmeiser, H. and Wagner, J. (2013) The impact of introducing insurance guaranty schemes on pricing and capital structure. Journal of Risk and Insurance, 80 (2), 273–308.Google Scholar
Schmeiser, H. and Wagner, J. (2015) A proposal on how the regulator should set minimum interest rate guarantees in participating life insurance contracts. Journal of Risk and Insurance, 82 (3), 659–686.CrossRefGoogle Scholar
Shreve, S. (2004) Stochastic Calculus for Finance II. New York: Springer.Google Scholar