Now showing 1 - 10 of 31
  • Publication
    How to Derive Optimal Guarantee Levels in Participating Life Insurance Contracts
    (Emerald Group Publishing Limited, 2019-12-04) ;
    Fischer, Marius
    ;
    Participating life insurance contracts are common products in Europe. Their savings component typically exhibits an interest rate guarantee in combination with a surplus participation mechanism. Together, these two features constitute an embedded option. The purpose of this article is to show how an insurance company can maximize policyholder utility by setting the level of the interest rate guarantee in line with his preferences. We develop a general model of life insurance, taking stochastic interest rates, early default and regular premium payments into account. Furthermore, we assume that equity holders receive risk adequate returns on their initial equity contribution. Our findings show that the optimal level for the interest rate guarantee is far below the maximum value typically set by the supervisory authorities and insurance companies.
  • Publication
    Consumption-Based Asset Pricing in Insurance Markets: Yet Another Puzzle?
    Although insurance is the typical textbook example for an asset that negatively correlates with consumption, the suitability of the classical consumption‐based asset pricing model with power utility to explain historical premiums and claims has not yet been tested. We fill this gap by fitting it to property–casualty market data for Australia, Italy, the Netherlands, the United States, and Germany. In doing so, we reveal yet another asset pricing anomaly. More specifically, the consumption‐based model implies even larger relative risk aversion coefficients in the insurance sectors than in the equity markets of the aforementioned countries. To solve this puzzle, we draw on the loss aversion and narrow framing approach by Barberis, Huang, and Santos (2001) as well as the second‐degree expectation dependence framework by Dionne, Li, and Okou (2015), with encouraging results.
    Type:
    Journal:
    Volume:
    Issue:
  • Publication
    Portfolio Optimization Under Solvency II: Implicit Constraints Imposed by the Market Risk Standard Formula
    We optimize a life insurance company's asset allocation in the context of classical portfolio theory when the firm needs to adhere to the market risk capital requirements of Solvency II. The discussion starts with a brief review of the standard formula and the introduction of a parsimonious partial internal model. Subsequently, we estimate empirical risk–return profiles for the main asset classes held by European insurers and run a quadratic optimization program to derive nondominated frontiers with budget, short-sale, and investment constraints. We then compute the capital charges under both solvency models and identify those efficient portfolio compositions that are permitted for an exogenously given amount of equity. Finally, we consider a systematically selected set of inefficient portfolios and check their admissibility, too. Our results show that the standard formula suffers from severe shortcomings that interfere with economically sensible asset management decisions. Therefore, the introduction of Solvency II in its current form is likely to have an adverse impact on certain parts of the European insurance sector.
    Type:
    Journal:
    Volume:
    Issue:
    Scopus© Citations 38
  • Publication
    Life Settlement Funds: Current Valuation Practices and Areas for Improvement
    (Wiley-Blackwell, 2016-09-23) ;
    Affolter, Sarah
    ;
    We analyse the prevailing valuation practices in the settlement industry based on a sample of eleven funds that cover a large fraction of the current market. The most striking result is that a majority of asset managers seems to substantially overvalue their portfolios relative to the prices of recently closed comparable transactions. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The consequences are a dissimilar treatment of investor groups in open-end fund structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive compatible fee structures.
    Type:
    Journal:
    Volume:
    Issue:
    Scopus© Citations 9
  • Publication
    On Consumer Preferences and the Willingness to Pay for Term Life Insurance
    We run a choice-based conjoint analysis for term life insurance with a sample of 2,017 German consumers, for which data has been collected through web-based experiments. Individual-level part-worth utility profiles are estimated by means of a hierarchical Bayes model. Drawing on the elicited preference structures, we then compute relative attribute importances and different willingness to pay measures. In addition, we present comprehensive simulation results for a realistic competitive setting that allows us to assess market expansion as well as product switching effects. Brand, critical illness cover, and medical underwriting turn out to be the most important nonprice product attributes. Hence, if a policy comprises the favored specifications of those, customers are prepared to accept substantial markups in the monthly premium. Furthermore, preferences vary considerably across the sample, implying that product differentiation is well-suited to avoid price pressure and grow market shares. Yet, we also document a large fraction of individuals that exhibit no willingness to pay for term life insurance at all, presumably due to the absence of a need for mortality risk coverage. Finally, based on estimated demand sensitivities and a set of cost assumptions, it is shown that insurers require an in-depth understanding of preferences to identify the profit-maximizing price.
    Type:
    Journal:
    Volume:
    Issue:
    Scopus© Citations 26
  • Publication
    Stock vs. Mutual Insurers: Who Should and Who Does Charge More?
    (Elsevier, 2015-05-01) ; ;
    Rymaszewski, Przemyslaw
    We contribute to the literature by developing a normative theory of the relationship between stock and mutual insurers based on a contingent claims framework. To consistently price policies provided by firms in these two legal forms of organization, we extend the work of Doherty and Garven (1986) to the mutual case, thus ensuring that the formulae for the stock insurer are nested in our more general model. This set-up allows us to separately consider the ownership and policyholder stakes included in the mutual insurance premium and explicitly takes into account the right to charge additional premiums in times of financial distress, restrictions on the ability of members to realize the value of their equity stake, as well as relevant market frictions. Based on a numerical implementation of our model, we are able to show that, for the premiums of stock and mutuals insurers to be equal, the latter would need to hold comparatively less equity capital. We then evaluate panel data for the German motor liability insurance sector and demonstrate that observed premiums are not consistent with our normative findings. The combination of theory and empirical evidence is not compatible with full competition in insurance markets and suggests that policies offered by stock insurers are overpriced relative to policies of mutuals. Consequently, we suspect considerable wealth transfers between the stakeholder groups.
    Type:
    Journal:
    Volume:
    Issue:
    Scopus© Citations 15
  • Publication
    What Drives Insurers' Demand for Cat Bond Investments? Evidence from a Pan-European Survey
    (Palgrave Macmillan Ltd., 2013-07-10) ; ;
    Although catastrophe bonds are continuing to gain importance in today's risk transfer and capital markets, little is known about the decision-making processes that drive the demand for this aspiring asset class. In the paper at hand, we focus on one segment of the investing community. Our main research goal is to identify major determinants of the cat bond investment decision of insurance and reinsurance companies. For this purpose, we have conducted a comprehensive survey among senior executives in the European insurance industry. Evaluating the resulting data set by means of exploratory factor analysis and logistic regression methodology, we are able to show that the expertise and experience with regard to cat bonds, the perceived fit of the instrument with the prevailing asset and liability management strategy, as well as the applicable regulatory regime are significant drivers of an insurer's propensity to invest. These statistical findings are supported by further qualitative survey results and additional information from structured interviews with the investment managers of four large dedicated cat bond funds.
    Type:
    Journal:
    Volume:
    Issue:
    Scopus© Citations 9
  • Publication
    Performance and Risks of Open-End Life Settlement Funds
    In this paper, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our dataset cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.
    Type:
    Journal:
    Volume:
    Issue:
    Scopus© Citations 18