Now showing 1 - 10 of 117
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Market-Consistent Valuation of Natural Catastrophe Risk

2022-01 , Beer, Simone , Braun, Alexander

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Fair Value Measurement in the Life Settlement Market

2020-01 , Braun, Alexander , Xu, Jiahua

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Consumption-Based Asset Pricing in Insurance Markets: Yet Another Puzzle?

2019-09-01 , Braun, Alexander , Luca, Daliana , Schmeiser, Hato

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.

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Portfolio Optimization Under Solvency II: Implicit Constraints Imposed by the Market Risk Standard Formula

2017-03-01 , Braun, Alexander , Schmeiser, Hato , Schreiber, Florian

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.

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Der vollkommene Markt – ein nahendes Dilemma der Assekuranz?

2022-09 , Fleischer, Martin , Braun, Alexander , Ufert, Aneta , Walthes, Frank

Perfect competition describes the theoretical ideal of a market. For the insurance industry, this paradigm is more current than ever before. The digital transformation shifts the insurance industry closer towards a perfect market. The existing polypolistic market structure splits up into two submarkets: a classical market with customers that rarely compare different offerings and a transparent market in which standardization and comparisons are of central importance. The transparent comparison market is much closer to a perfect market than the classical market. It also implies other profit function drivers. As a consequence, the two submarkets require different competencies. Insurers are confronted with a strategic dilemma: they can either enter the comparison market and specialize on its characteristics by being a fast follower. Alternatively, they have to lay their focus on the permanent break-away from the comparison market and build up unique selling propositions that make them first movers.

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Asset Pricing and Extreme Event Risk: Common Factors in ILS Fund Returns

2019-05 , Braun, Alexander , Ben Ammar, Semir , Eling, Martin

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Determinants of the Demand for Political Risk Insurance: Evidence from an International Survey

2018-05-14 , Braun, Alexander , Fischer, Marius

The exposure of corporations to political risks has increased in the past years, mainly driven by globalization and the outsourcing of production to emerging markets. One way to address these new challenges is Political Risk Insurance (PRI), which, however, has attracted little scholarly interest to date. We address this research gap by identifying the major determinants of the demand for PRI. To this end, we developed an extensive questionnaire and distributed it among insurance managers in Central Europe. Our empirical analysis builds on Exploratory Factor Analysis and Logistic Regression. We are able to show that a company’s propensity to purchase PRI increases with its perceived exposure to political risks, its perceived experience and expertise with the instrument, as well as the perceived adequacy of the contract’s price. Other factors, such as the size of the firm, the perceived importance of its risk management department or the perceived availability of information on PRI, do not seem to play a significant role.

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Performance Measurement in the Life Insurance Industry: An Asset-Liability Perspective

2021-01-01 , Braun, Alexander , Schreiber, Florian

Established risk-adjusted investment performance measures such as the Sharpe, the Sortino or the Calmar Ratio have been developed with an exclusive focus on the mutual and hedge fund industries. Consequently, they are less suited for liability-driven investors such as life insurance companies, whose portfolio choice is materially affected by the substantial interest rate sensitivity of their long-term contractual obligations. In order to tackle this limitation, we introduce the Asset-Liability Sharpe Ratio, which is theoretically motivated, computable based on publicly-available data, incentive compatible, and relevant. Hence, it should be a valuable new tool for performance assessment in the life insurance industry.

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How to Derive Optimal Guarantee Levels in Participating Life Insurance Contracts

2019-12-04 , Braun, Alexander , Fischer, Marius , Schmeiser, Hato

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.

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Return on Risk-Adjusted Capital Under Solvency II: Implications for the Asset Management of Insurance Companies

2018-07-01 , Braun, Alexander , Schmeiser, Hato , Schreiber, Florian