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Asset management and surplus distribution strategies in life insurance: An examination with respect to risk pricing and risk measurement

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  • Gatzert, Nadine
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    Abstract

    In this paper, we investigate the impact of different asset management and surplus distribution strategies in life insurance on risk-neutral pricing and shortfall risk. In general, these feedback mechanisms affect the contract's payoff and hence directly influence pricing and risk measurement. To isolate the effect of such strategies on shortfall risk, we calibrate contract parameters so that the compared contracts have the same market value and same default-value-to-liability ratio. This way, the fair valuation method is extended since, in addition to the contract's market value, the default put option value is fixed. We then compare shortfall probability and expected shortfall and show the substantial impact of different management mechanisms acting on the asset and liability side.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 42 (2008)
    Issue (Month): 2 (April)
    Pages: 839-849

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    Handle: RePEc:eee:insuma:v:42:y:2008:i:2:p:839-849

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    Web page: http://www.elsevier.com/locate/inca/505554

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    1. Grosen, Anders & Lochte Jorgensen, Peter, 2000. "Fair valuation of life insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 26(1), pages 37-57, February.
    2. Nadine Gatzert & Alexander Kling, 2007. "Analysis of Participating Life Insurance Contracts: A Unification Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 74(3), pages 547-570.
    3. Bauer, Daniel & Kiesel, Rudiger & Kling, Alexander & Ru[ss], Jochen, 2006. "Risk-neutral valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 39(2), pages 171-183, October.
    4. David F. Babbel & Anthony M. Santomero, 1997. "Risk Management by Insurers: An Analysis of the Process," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
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    6. Kling, Alexander & Richter, Andreas & Ru[ss], Jochen, 2007. "The interaction of guarantees, surplus distribution, and asset allocation in with-profit life insurance policies," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 40(1), pages 164-178, January.
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    9. Berketi, Alexandra K. & Macdonald, Angus S., 1999. "The effect of the nature of the liabilities on the solvency and maturity payouts of a UK life office fund: a stochastic evaluation," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 24(1-2), pages 117-138, March.
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    12. Barbarin, Jerome & Devolder, Pierre, 2005. "Risk measure and fair valuation of an investment guarantee in life insurance," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 37(2), pages 297-323, October.
    13. Tanskanen, Antti Juho & Lukkarinen, Jani, 2003. "Fair valuation of path-dependent participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 33(3), pages 595-609, December.
    14. S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
    15. Ballotta, Laura & Esposito, Giorgia & Haberman, Steven, 2006. "The IASB Insurance Project for life insurance contracts: Impact on reserving methods and solvency requirements," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 39(3), pages 356-375, December.
    16. Lynn Wirch, Julia & Hardy, Mary R., 1999. "A synthesis of risk measures for capital adequacy," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 25(3), pages 337-347, December.
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    Cited by:
    1. Bohnert, Alexander & Gatzert, Nadine, 2012. "Analyzing surplus appropriation schemes in participating life insurance from the insurer’s and the policyholder’s perspective," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 50(1), pages 64-78.
    2. Berdin, Elia & Gründl, Helmut, 2014. "The effects of a low interest rate environment on life insurers," ICIR Working Paper Series, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt 15/14, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
    3. Graf, Stefan & Kling, Alexander & Ruß, Jochen, 2011. "Risk analysis and valuation of life insurance contracts: Combining actuarial and financial approaches," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 49(1), pages 115-125, July.
    4. Berdin, Elia & Gründl, Helmut, 2014. "The effects of a low interest rate environment on life insurers," SAFE Working Paper Series, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt 65, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    5. Zemp, Alexandra, 2011. "Risk comparison of different bonus distribution approaches in participating life insurance," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 49(2), pages 249-264, September.
    6. Faust, Roger & Schmeiser, Hato & Zemp, Alexandra, 2012. "A performance analysis of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 51(1), pages 158-171.

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