Is Fair Pricing Possible? An Analysis of Participating Life Insurance Portfolios
Journal
The Journal of Risk & Insurance
ISSN
0022-4367
ISSN-Digital
1539-6975
Type
journal article
Date Issued
2017-11-07
Author(s)
Abstract
Pooling individual customers with different inception dates into a single legal entity may generate intergenerational subsidies that are accentuated when the insurer has limited liability. This article aims to investigate whether an insurer can charge fair premiums while simultaneously ensuring identical levels of default risk—measured by the value of the default put option ratio—for all generations. The decision variables for achieving these goals are asset allocation and the amount of the insurer's equity capital. We propose an accounting framework where the insurer controls for insolvency positions annually after the first contract is issued. Additionally, a run‐off framework is developed where the insurer does not declare bankruptcy in case of an insolvency, but instead stops issuing new policies and runs the company until the assets are exhausted or the last policyholder is paid. We find that intergenerational subsidies and different levels of default risk per generation cannot be avoided whenever we face a positive default risk.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SoM - Responsible Corporate Competitiveness (RoCC)
Refereed
Yes
Publisher
American Risk and Insurance Ass.
Publisher place
Malvern, Pa.
Volume
86
Number
2
Start page
521
End page
560
Subject(s)
Division(s)
Eprints ID
252111