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Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers

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Author Info

  • Maathumai Nirmalendran

    ()
    (Finity Consulting)

  • Michael Sherris

    ()
    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Katja Hanewald

    ()
    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

Abstract

This paper provides a detailed quantitative assessment of the impact of solvency capital requirements on product pricing and shareholder value for a life insurer. A multi-period firm value maximization model for a life annuity provider, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive optimal capital and pricing strategies for a range of solvency levels reflecting differences in regulatory regimes. The model is calibrated using realistic assumptions and the sensitivity of results assessed. The results show that value-maximizing insurers should target higher solvency levels than the Solvency II regulatory 99.5% under assumptions of reasonable levels of policyholder's aversion to insolvency risk. Even in the case of less restrictive solvency regulation, policyholder price elasticity and solvency preferences are shown to be important factors for a life insurer's profit maximizing strategy.

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File URL: http://cepar.edu.au/media/80542/wp_14_solvency_capital__pricing_and_capitalization.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201213.

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Length: 24 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:asb:wpaper:201213

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Related research

Keywords: Life annuity; insurance regulation; solvency; longevity risk;

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  1. Sachi Purcal & John Piggott, 2008. "Explaining Low Annuity Demand: An Optimal Portfolio Application to Japan," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 493-516.
  2. Jeffrey R. Brown & Peter R. Orszag, 2006. "The Political Economy of Government-Issued Longevity Bonds," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 611-631.
  3. Wills, Samuel & Sherris, Michael, 2010. "Securitization, structuring and pricing of longevity risk," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 173-185, February.
  4. Ray Rees & Hugh Gravelle & Achim Wambach, 1999. "Regulation of Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 55-68, June.
  5. Helmut Gr√ľndl & Thomas Post & Roman N. Schulze, 2006. "To Hedge or Not to Hedge: Managing Demographic Risk in Life Insurance Companies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 19-41.
  6. Zanjani, George, 2002. "Pricing and capital allocation in catastrophe insurance," Journal of Financial Economics, Elsevier, vol. 65(2), pages 283-305, August.
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