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The Bankruptcy Cost of the Life Insurance Industry Under Regulatory Forbearance

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  • Shang-Yin Yang
  • Ya-Wen Hwang
  • Shih-Chieh Chang

Abstract

In this study the Taiwan Insurance Guaranty Fund (TIGF) is introduced to investigate the ex ante assessment insurance guaranty scheme. We study the bankruptcy cost when a financially troubled life insurer is taken over by TIGF. The pricing formula of the fair premium of TIGF incorporating the regulatory forbearance is derived. The embedded Parisian option due to regulatory forbearance on fair premiums is investigated. The numerical results show that leverage ratio, asset volatility, grace period, and intervention criterion influence the default costs. Asset volatility has a significant effect on the default option, while leverage ratio is shown to aggravate the negative influence from the volatility of risky asset. Furthermore, the numerical analysis concludes that the premium for the insurance guaranty fund is risk sensitive and that a risk-based premium scheme could be implemented, hence, to ease the moral hazard.

Suggested Citation

  • Shang-Yin Yang & Ya-Wen Hwang & Shih-Chieh Chang, 2012. "The Bankruptcy Cost of the Life Insurance Industry Under Regulatory Forbearance," North American Actuarial Journal, Taylor & Francis Journals, vol. 16(4), pages 513-523.
    • Handle: RePEc:taf:uaajxx:v:16:y:2012:i:4:p:513-523
    DOI: 10.1080/10920277.2012.10597646
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    Cited by:

    1. Chang Shih-Chieh Bill & Lee Yen-Kuan, 2020. "Currency Uncertainty, Interest Guarantee, and Risk-Based Premiums in Life Insurance Guaranty Schemes," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 14(2), pages 1-30, July.
    2. Hangsuck Lee & Seongjoo Song & Gaeun Lee, 2023. "Insurance guaranty premiums and exchange options," Mathematics and Financial Economics, Springer, volume 17, number 3, June.
    3. Li, Xin & Liu, Haibo & Tang, Qihe & Zhu, Jinxia, 2020. "Liquidation risk in insurance under contemporary regulatory frameworks," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 36-49.
    4. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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