A risk-based premium: What does it mean for DB plan sponsors?
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 54 (2014)
Issue (Month): C ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/inca/505554|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David A. Love & Paul A. Smith & David W. Wilcox, 2009. "Should risky firms offer risk-free DB pensions?," Finance and Economics Discussion Series 2009-20, Board of Governors of the Federal Reserve System (U.S.).
- Treynor, Jack L, 1977. "The Principles of Corporate Pension Finance," Journal of Finance, American Finance Association, vol. 32(2), pages 627-638, May.
- Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
- Duan, Jin-Chuan & Yu, Min-Teh, 2005. "Fair insurance guaranty premia in the presence of risk-based capital regulations, stochastic interest rate and catastrophe risk," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2435-2454, October.
- 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.
- Alan J. Marcus, 1983.
"Corporate Pension Policy and the Value of PBGC Insurance,"
NBER Working Papers
1217, National Bureau of Economic Research, Inc.
- Alan Marcus, 1987. "Corporate Pension Policy and the Value of PBGC Insurance," NBER Chapters, in: Issues in Pension Economics, pages 49-80 National Bureau of Economic Research, Inc.
- 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.
- Fiona Stewart, 2007. "Benefit Security Pension Fund Guarantee Schemes," OECD Working Papers on Insurance and Private Pensions 5, OECD Publishing.
- 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.
- Cummins, J David, 1988. " Risk-Based Premiums for Insurance Guaranty Funds," Journal of Finance, American Finance Association, vol. 43(4), pages 823-839, September.
- Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
- Sandra Blome & Kai Fachinger & Dorothee Franzen & Gerhard Scheuenstuhl & Juan Yermo, 2007. "Pension Fund Regulation and Risk Management: Results from an ALM Optimisation Exercise," OECD Working Papers on Insurance and Private Pensions 8, OECD Publishing.
- 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.
- George Pennacchi & Christopher M. Lewis, 1994.
"The value of Pension Benefit Guaranty Corporation insurance,"
Federal Reserve Bank of Cleveland, pages 735-756.
- 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 735-753, August.
- 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.
- 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.
- Jeffrey R. Brown, 2007. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," NBER Working Papers 13438, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:54:y:2014:i:c:p:1-11. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.