Advertisement

European Actuarial Journal

, Volume 7, Issue 1, pp 29–50 | Cite as

Runoff or redesign? Alternative guarantees and new business strategies for participating life insurance

Original Research Paper
  • 219 Downloads

Abstract

Portfolios of traditional participating life insurance contracts with year-to-year (cliquet-style) guarantees are under pressure in the current situation of persistently low interest rates when valued in a market consistent valuation framework. For a portfolio with a fixed technical interest rate it has been shown in Reuß et al. (Innov Quant Risk Manag 99:185–208, 2015) that product designs with alternative guarantees are able to reduce the insurers risk and increase capital efficiency. The objective of this paper is to analyze interactions between new contracts and an existing book of insurance contracts. We consider an insurer that has built up a portfolio in the past under changing guaranteed interest rates and market conditions. Then, we analyze different new business strategies for this insurer and the resulting risk exposure and capital requirement. We show that—if all contracts are covered by the same pool of assets—switching to carefully designed participating contracts with alternative guarantees is typically preferable to a runoff scenario and can substantially reduce financial risk in future years.

Keywords

Participating life insurance Interest rate guarantees Capital efficiency Portfolio mix New business strategy Solvency II Solvency capital requirements ORSA 

References

  1. 1.
    Alexandrova M, Bohnert A, Gatzert N, Ruß J (2015) Innovative equity-linked life insurance based on traditional products: the case of select-products. Working Paper, University of Erlangen-NürnbergGoogle Scholar
  2. 2.
    Barbarin J, Devolder P (2005) Risk measure and fair valuation of an investment guarantee in life insurance. Insur Math Econ 37(2):297–323MathSciNetCrossRefMATHGoogle Scholar
  3. 3.
    Bauer D, Kiesel R, Kling A, Russ J (2006) Risk-neutral valuation of participating life insurance contracts. Insur Math Econ 39(2):171–183MathSciNetCrossRefMATHGoogle Scholar
  4. 4.
    Bauer D, Reuss A, Singer D (2012) On the calculation of solvency capital requirement based on nested simulations. ASTIN Bull 42(2):453–499MathSciNetMATHGoogle Scholar
  5. 5.
    Berdin E, Gründl H (2015) The effects of a low interest rate environment on life insurers. Geneva Pap Risk Insur 40(3):385–415CrossRefGoogle Scholar
  6. 6.
    Branger N, Schlag C (2004) Zinsderivate. Modelle und Bewertung, BerlinGoogle Scholar
  7. 7.
    Briys E, de Varenne F (1997) On the risk of insurance liabilities: debunking some common pitfalls. J Risk Insur 64(4):637–694CrossRefGoogle Scholar
  8. 8.
  9. 9.
    CFO-Forum (2016) Market consistent embedded value principles. http://www.cfoforum.nl/downloads/CFO-Forum_MCEV_Principles_and_Guidance_April_2016.pdf
  10. 10.
    DAV (2011) DAV Fachgrundsatz zum market consistent embedded value. Köln. https://aktuar.de/unsere-themen/fachgrundsaetze-oeffentlich/2011-06-16-MCEV-final.pdf
  11. 11.
    EIOPA (2009) Directive 2009/138/EC of the European Parliament and of the Council. http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02009L0138-20140523&from=EN
  12. 12.
  13. 13.
    Gatzert N (2008) Asset management and surplus distribution strategies in life insurance: an examination with respect to risk pricing and risk measurement. Insur Math Econ 42(2):839–849MathSciNetCrossRefMATHGoogle Scholar
  14. 14.
    Gatzert N, Kling A (2007) Analysis of participating life insurance contracts: a unication approach. J Risk Insur 74(3):547–570CrossRefGoogle Scholar
  15. 15.
    Glasserman P (2003) Monte Carlo methods in financial engineering. Springer, New YorkCrossRefMATHGoogle Scholar
  16. 16.
    Graf S, Kling A, Russ J (2011) Risk analysis and valuation of life insurance contracts: combining actuarial and financial approaches. Insur Math Econ 49(1):115–125MathSciNetCrossRefMATHGoogle Scholar
  17. 17.
    Grosen A, Jensen B, Jørgensen P (2001) A finite dierence approach to the valuation of path dependent life insurance liabilities. Geneva Pap Risk Insur Theory 26:57–84CrossRefGoogle Scholar
  18. 18.
    Grosen A, Jørgensen P (2000) Fair valuation of life insurance liabilities: the impact of interest rate guarantees, surrender options, and bonus policies. Insur Math Econ 26(1):37–57CrossRefMATHGoogle Scholar
  19. 19.
    Grosen A, Jørgensen P (2002) Life insurance liabilities at market value: an analysis of insolvency risk, bonus policy, and regulatory intervention rules in a barrier option framework. J Risk Insur 69(1):63–91CrossRefGoogle Scholar
  20. 20.
    Hieber P, Korn R, Scherer M (2015) Analyzing the effect of low interest rates on the surplus participation of life insurance policies with different annual interest rate guarantees. Eur Actuar J 5(1):11–28MathSciNetCrossRefMATHGoogle Scholar
  21. 21.
    Kling A, Richter A, Russ J (2007) The impact of surplus distribution on the risk exposure of with profit life insurance policies including interest rate guarantees. J Risk Insur 74(3):571–589CrossRefGoogle Scholar
  22. 22.
    Kling A, Richter A, Russ J (2007) The interaction of guarantees, surplus distribution, and asset allocation in with-prot life insurance policies. Insur Math Econ 40(1):164–178CrossRefMATHGoogle Scholar
  23. 23.
    Miltersen K, Persson S-A (2003) Guaranteed investment contracts: distributed and undistributed excess return. Scand Actuar J 103(4):257–279MathSciNetCrossRefMATHGoogle Scholar
  24. 24.
    Oechslin J, Aubry O, Aellig M (2007) Replicating embedded options. Life Pensions, pp. 47–52Google Scholar
  25. 25.
    Reuß A, Ruß J, Wieland J (2015) Participating life insurance contracts under risk based solvency frameworks: how to increase capital efficiency by product design. Innov Quant Risk Manag, Springer Proceedings in Mathematics and Statistics 99:185–208Google Scholar
  26. 26.
    Reuß A, Ruß J, Wieland J (2016) Participating life insurance products with alternative guarantees: reconciling policyholders’ and insurers’ interests. Risks 4(2):11 (Special issue: life insurance and pensions)CrossRefGoogle Scholar
  27. 27.
    Seyboth M (2011) Der Market Consistent Appraisal Value und seine Anwendung im Rahmen der wertorientierten Steuerung von Lebensversicherungsunternehmen. PhD Thesis, University of UlmGoogle Scholar
  28. 28.
    Vasicek O (1977) An equilibrium characterization of the term structure. J Financial Econ 5(2):177–188CrossRefGoogle Scholar
  29. 29.
    Zaglauer K, Bauer D (2008) Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment. Insur Math Econ 43(1):29–40MathSciNetCrossRefMATHGoogle Scholar

Copyright information

© EAJ Association 2016

Authors and Affiliations

  1. 1.Ulm University and Institut für Finanz- und Aktuarwissenschaften (ifa)UlmGermany

Personalised recommendations