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A risk-based model for the valuation of pension insurance

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  • Chen, An
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    Abstract

    In the US, defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC). Taking account of the fact that the PBGC covers only the residual deficits of the pension fund the sponsoring company is unable to cover and that the plans can be prematurely terminated, we consider a model that accounts for the joint dynamics of the pension fund’s and sponsoring firm’s assets in order to effectively determine the risk-based pension premium for the insurance provided by the PBGC. We obtain a closed-form pricing formula for this risk-based premium. Its magnitude depends highly on the investment portfolio of the pension fund and of the sponsoring company as well as the correlation between these two portfolios.

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    Bibliographic Info

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

    Volume (Year): 49 (2011)
    Issue (Month): 3 ()
    Pages: 401-409

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    Handle: RePEc:eee:insuma:v:49:y:2011:i:3:p:401-409

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

    Related research

    Keywords: Pension insurance; PBGC; Defined benefit plan; Correlation; Sponsor support;

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    Cited by:
    1. Chen, An & Uzelac, Filip, 2014. "A risk-based premium: What does it mean for DB plan sponsors?," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 54(C), pages 1-11.
    2. Dirk Broeders & An Chen & Birgit Koos, 2014. "Utility-equivalence of pension security mechanisms," DNB Working Papers, Netherlands Central Bank, Research Department 414, Netherlands Central Bank, Research Department.

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