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A risk-based premium: What does it mean for DB plan sponsors?

  • Chen, An
  • Uzelac, Filip
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    This 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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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 54 (2014)
    Issue (Month): C ()
    Pages: 1-11

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    Handle: RePEc:eee:insuma:v:54:y:2014:i:c:p:1-11
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    1. Hato Schmeiser & Joël Wagner, 2013. "The Impact of Introducing Insurance Guaranty Schemes on Pricing and Capital Structure," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 273-308, 06.
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    7. Jeffrey R. Brown, 2008. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 177-198, Winter.
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    11. Kalra, Raman & Jain, Gautam, 1997. "A continuous-time model to determine the intervention policy for PBGC," Journal of Banking & Finance, Elsevier, vol. 21(8), pages 1159-1177, August.
    12. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
    13. Han, Li-Ming & Lai, Gene C. & Witt, Robert C., 1997. "A financial-economic evaluation of insurance guaranty fund system: An agency cost perspective," Journal of Banking & Finance, Elsevier, vol. 21(8), pages 1107-1129, August.
    14. Zvi Bodie, 2006. "On asset-liability matching and federal deposit and pension insurance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 323-330.
    15. Przemysław Rymaszewski & Hato Schmeiser & Joël Wagner, 2012. "Under What Conditions Is an Insurance Guaranty Fund Beneficial for Policyholders?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 785-815, 09.
    16. Pennacchi, George G & Lewis, Christopher M, 1994. "The Value of Pension Benefit Guaranty Corporation Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 735-53, August.
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