A risk-based premium: What does it mean for DB plan sponsors?
AbstractThis paper develops a risked-based premium calculation model for the insurance provided by the Pension Benefit Guaranty Corporation (PBGC). It takes account of the pension fund’s and the plan sponsor’s investment policy and extends Chen (2011) by considering distress termination triggered by the sponsor’s underfunding. We empirically illustrate our theoretical pricing formula for the 100 biggest American DB sponsoring companies. Our result clearly casts doubt on the current practice where about 70% of the PBGC premiums charged are flat. We observe that the funding ratio and the leverage are the main risk factors in a risk-based premium calculation.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 54 (2014)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/505554
PBGC; Defined benefit plan; Distress termination; Correlation; Sponsor support;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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