Default risk, bankruptcy procedures and the market value of life insurance liabilities
Abstract
The topic of insolvency risk in connection with life insurance companies has recently attracted a great deal of attention. In this paper, the question is investigated of how the value of the equity and of the liability of a life insurance company are affected by the default risk and the choice of the relevant bankruptcy procedure. As an example, the U.S. Bankruptcy Code with Chapter 7 and Chapter 11 bankruptcy procedures is used. Grosen and Jørgensen's (2002) contingent claim model, implying only a Chapter 7 bankruptcy procedure, is extended to allow for more general bankruptcy procedures such as Chapter 11. Thus, more realistically, default and liquidation are modelled as distinguishable events. This is realized by using so-called standard and cumulative Parisian barrier option frameworks. It is shown that these options have appealing interpretations in terms of the bankruptcy mechanism. Furthermore, a number of representative numerical analyses and comparative statics are performed in order to investigate the effects of different parameter changes on the values of the insurance company's equity and liability, and hence on the value of the life insurance contract. To complete the analysis, the shortfall probabilities of the insurance company implied by the proposed models are computed and compared.(This abstract was borrowed from another version of this item.)
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Bibliographic Info
Article provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 40 (2007)
Issue (Month): 2 (March)
Pages: 231-255
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Handle: RePEc:eee:insuma:v:40:y:2007:i:2:p:231-255
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Web page: http://www.elsevier.com/locate/inca/505554
For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).
Related research
Keywords:Other versions of this item:
- An Chen & Michael Suchanecki, 2006. "Default Risk, Bankruptcy Procedures and the Market Value of Life Insurance Liabilities," Bonn Econ Discussion Papers bgse8_2006, University of Bonn, Germany.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Antje Mahayni & Erik Schlögl, 2003.
"The Risk Management of Minimum Return Guarantees,"
Research Paper Series
102, Quantitative Finance Research Centre, University of Technology, Sydney.
- Antje Mahayni & Erik Schlögl, 2008. "The Risk Management of Minimum Return Guarantees," BuR - Business Research, German Academic Association for Business Research, vol. 1(1), pages 55-76, May.
- Antje Mahayni & Erik Schlögl, 2003. "The Risk Management of Minimum Return Guarantees," Bonn Econ Discussion Papers bgse18_2003, University of Bonn, Germany.
- Chen, An, 2008.
"Loss analysis of a life insurance company applying discrete-time risk-minimizing hedging strategies,"
Insurance: Mathematics and Economics,
Elsevier, vol. 42(3), pages 1035-1049, June.
- An Chen, 2005. "Loss Analysis of a Life Insurance Company Applying Discrete-time Risk-minimizing Hedging Strategies," Bonn Econ Discussion Papers bgse19_2005, University of Bonn, Germany.
- An Chen & Xia Su, 2009. "Knightian uncertainty and insurance regulation decision," Decisions in Economics and Finance, Springer, vol. 32(1), pages 13-33, May.
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