Skip to main content
×
Home
    • Aa
    • Aa

OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION

  • An Chen (a1) and Peter Hieber (a2)
Abstract
Abstract

In a typical equity-linked life insurance contract, the insurance company is entitled to a share of return surpluses as compensation for the return guarantee granted to the policyholders. The set of possible contract terms might, however, be restricted by a regulatory default constraint — a fact that can force the two parties to initiate sub-optimal insurance contracts. We show that this effect can be mitigated if regulatory policy is more flexible. We suggest that the regulator implement a traffic light system where companies are forced to reduce the riskiness of their asset allocation in distress. In a utility-based framework, we show that the introduction of such a system can increase the benefits of the policyholder without deteriorating the benefits of the insurance company. At the same time, default probabilities (and thus solvency capital requirements) can be reduced.

    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION
      Available formats
      ×
      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about sending content to Dropbox.

      OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION
      Available formats
      ×
      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about sending content to Google Drive.

      OPTIMAL ASSET ALLOCATION IN LIFE INSURANCE: THE IMPACT OF REGULATION
      Available formats
      ×
Copyright
Corresponding author
E-Mail: peter.hieber@uni-ulm.de
References
Hide All
BauerD., KieselR., KlingA. and RußJ. (2005) Risk neutral valuation of participating life insurance contracts. Insurance: Mathematics & Economics, 39 (2), 171183.
BlackF. and CoxJ.C. (1976) Valuing corporate securities: Some effects of bond indenture provisions. Journal of Finance, 31 (2), 351367.
BohnertA., GatzertN. and JørgensenP. (2015) On the management of life insurance company risk by strategic choice of product mix, investment strategy and surplus appropriation schemes. Insurance: Mathematics & Economics, 60, 8397.
BrennanM.J. and SchwartzE.S. (1976) The pricing of equity-linked life insurance policies with an asset value guarantee. Journal of Financial Economics, 3 (3), 195213.
ChenA. and SuchaneckiM. (2007) Default risk, bankruptcy procedures and the market value of life insurance liabilities. Insurance: Mathematics and Economics, 40, 231255.
DongM., GründlH. and SchlütterS. (2015) Is the risk-based meachanism always better? The risk-shifting behavior of insurers under different guarantee schemes. Journal of Insurance Issues, 38 (1), 7295.
DøskelandT.M. and NordahlH.A. (2008) Optimal pension insurance design. Journal of Banking & Finance, 32, 382392.
European Parliament. (2014) Solvency II directive: Directive 2014/51/EU of the European Parliament and of the Council. Official Journal of the European Union, https://eiopa.europa.eu/regulation-supervision/insurance/solvency-ii.
FilipovićD., KremslehnerR. and MuermannA. (2015) Optimal investment and premium policies under risk shifting and solvency regulation. Journal of Risk and Insurance, 82 (2), 261288.
FolksJ.L. and ChhikaraR.S. (1978) The inverse Gaussian distribution and its statistical application – a review. Journal of the Royal Statistical Society. Series B, 40 (3), 263289.
GatzertN. and SchmeiserH. (2008) Combining fair pricing and capital requirements for non-life insurance companies. Journal of Banking & Finance, 32 (12), 25892596.
GrafS., KlingA. and RußJ. (2011) Risk analysis and valuation of life insurance contracts: combining actuarial and financial approaches. Insurance: Mathematics & Economics, 49 (10), 115125.
GrafS., KlingA. and RußJ. (2012) Financial planning and risk-return profiles. European Actuarial Journal 2, 77104.
GrosenJ. and JørgensenP.L. (2002) Life insurance liabilities at market value: An analysis of insolvency risk, bonus policy, and regulatory intervention rules in a barrier option framework. Journal of Risk and Insurance, 69 (1), 6391.
HeH., KeirsteadW. and RebholzJ. (1998) Double lookbacks. Mathematical Finance, 8 (3), 201228.
HieberP., KornR. and SchererM. (2015) Analyzing the effect of low interest rates on the surplus participation of life insurance policies with different annual interest rate guarantees. European Actuarial Journal, 5 (1), 1128.
JørgensenP.L. (2007) Traffic light options. Journal of Banking & Finance, 31, 36983719.
MacMinnR.D. and WittR.C. (1987) A financial theory of the insurance firm under uncertainty and regulatory constraints. Geneva Papers on Risk and Insurance, 12 (42), 320.
McCabeG.M. and WittR.C. (1980) Insurance pricing and regulation under uncertainty: A chance-constrained approach. Journal of Risk and Insurance, 47 (4), 607635.
MohanN. and ZhangT. (2014) An analysis of risk-taking behavior for public defined benefit plans. Journal of Banking & Finance, 40, 403419.
PézierJ. and SchellerJ. (2013) Best portfolio insurance for long-term investment strategies in realistic conditions. Insurance: Mathematics & Economics, 52, 263274.
RauhJ.D. (2009) Risk shifting versus risk management: Investment policy in corporate pension plans. Review of Financial Studies, 22 (7), 26872733.
ReesR., GravelleH. and WambachA. (1999) Regulation of insurance markets. Geneva Papers on Risk and Insurance Theory, 24, 5568.
SchlütterS. (2014) Capital requirements or pricing constraints? An economic analysis of measures for insurance regulation. Journal of Risk Finance, 15 (5), 533554.
SchmeiserH. and WagnerJ. (2013) The impact of introducing insurance guaranty schemes on pricing and capital structure. Journal of Risk and Insurance, 80 (2), 273308.
SchmeiserH. and WagnerJ. (2015) A proposal on how the regulator should set minimum interest rate guarantees in participating life insurance contracts. Journal of Risk and Insurance, 82 (3), 659686.
ShreveS. (2004) Stochastic Calculus for Finance II. New York: Springer.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

ASTIN Bulletin: The Journal of the IAA
  • ISSN: 0515-0361
  • EISSN: 1783-1350
  • URL: /core/journals/astin-bulletin-journal-of-the-iaa
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords:

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 1
Total number of PDF views: 271 *
Loading metrics...

Abstract views

Total abstract views: 536 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 20th October 2017. This data will be updated every 24 hours.