scholarly journals Default risk, bankruptcy procedures and the market value of life insurance liabilities

2007 ◽  
Vol 40 (2) ◽  
pp. 231-255 ◽  
Author(s):  
An Chen ◽  
Michael Suchanecki
Keyword(s):  
Life Insurance ◽  
Default Risk ◽  
Market Value ◽  
Value Of Life

scholarly journals The IFRS 17 contractual service margin: a life insurance perspective

2021 ◽  
Vol 26 ◽  
Author(s):  
W. Yousuf ◽  
J. Stansfield ◽  
K. Malde ◽  
N. Mirin ◽  
R. Walton ◽  
...  
Keyword(s):  
Life Insurance ◽  
Market Value ◽  
Financial Statements ◽  
Insurance Contract ◽  
Accounting Standard ◽  
Insurance Contracts ◽  
Ifrs 4 ◽  
Insurance Perspective ◽  
To Come

Abstract IFRS 17 Insurance Contracts is a new accounting standard currently expected to come into force on 1 January 2023. It supersedes IFRS 4 Insurance Contracts. IFRS 17 establishes key principles that entities must apply in all aspects of the accounting of insurance contracts. In doing so, the Standard aims to increase the usefulness, comparability, transparency and quality of financial statements. A fundamental concept introduced by IFRS 17 is the contractual service margin (CSM). This represents the unearned profit that an entity expects to earn as it provides services. However, as a principles-based standard, IFRS 17 results in entities having to apply significant judgement when determining the inputs, assumptions and techniques it uses to determine the CSM at each reporting period. In general, the Standard resolves broad categories of mismatches which arise under IFRS 4. Notable examples include mismatches between assets recorded at current market value and liabilities calculated using fixed discount rates as well as inconsistencies in the timing of profit recognition over the duration of an insurance contract. However, there are requirements of IFRS 17 that may create economic or accounting mismatches of its own. For example, new mismatches could arise between the measurement of underlying contracts and the corresponding reinsurance held. Additionally, mismatches can still arise between the measurement of liabilities and the assets that support the liabilities. This paper explores the technical, operational and commercial issues that arise across these and other areas focusing on the CSM. As a standard that is still very much in its infancy, and for which wider consensus on topics is yet to be achieved, this paper aims to provide readers with a deeper understanding of the issues and opportunities that accompany it.

Asset Insulators

2020 ◽  
Author(s):  
Gabriel Chodorow-Reich ◽  
Andra Ghent ◽  
Valentin Haddad
Keyword(s):  
Market Value ◽  
Value Of Life ◽  
Insurance Companies ◽  
Security Level ◽  
Data Set ◽  
Market Prices ◽  
Life Insurers ◽  
Pass Through

Abstract We construct a new data set tracking the daily value of life insurers’ assets at the security level. Outside of the 2008–2009 crisis, a ${\$}$ 1 drop in the market value of assets reduces an insurer’s market equity by ${\$}$ 0.10. During the ?nancial crisis, this pass-through rises to ${\$}$ 1. We explain this pattern by viewing insurance companies as asset insulators, institutions with stable, long-term liabilities that can ride out transitory dislocations in market prices. Illustrating the macroeconomic importance of insulation, insurers’ market equity declined by ${\$}$50 billion less than the duration-adjusted value of their securities during the crisis.

scholarly journals Discounting pension liabilities: funding versus value

2016 ◽  
Vol 15 (3) ◽  
pp. 254-284 ◽  
Author(s):  
JEFFREY R. BROWN ◽  
GEORGE G. PENNACCHI
Keyword(s):  
Discount Rate ◽  
Default Risk ◽  
Market Value ◽  
Public Pensions ◽  
Discount Rates ◽  
Cost Of Living ◽  
Pension Benefits ◽  
Pension Liabilities

AbstractWe argue that the appropriate discount rate for pension liabilities depends on the objective. In particular, if the objective is to measure pension under- or overfunding, a default-free discount rate should always be used, even if the liabilities are themselves not default-free. If, instead, the objective is to determine the market value of pension benefits, then it is appropriate that discount rates incorporate default risk. We also discuss the choice of a default-free discount rate. Finally, we show how cost-of-living adjustments that are common in public pensions can be accounted for and valued in this framework.

Insurer interest margin management, default risk, and life insurance policyholder protection

2018 ◽  
Vol 13 (3) ◽  
pp. 718-735
Author(s):  
Jyh-Horng Lin ◽  
Xuelian Li ◽  
Fu-Wei Huang
Keyword(s):  
Life Insurance ◽  
Default Risk ◽  
Risk Measures ◽  
Insurance Company ◽  
Life Insurance Company ◽  
Content Type ◽  
Loan Rate ◽  
Negative Effect ◽  
Positive Effect ◽  
Interest Margin

Purpose This paper aims to theoretically examine the effects of regulatory policyholder protection on spread behavior and default probability of a life insurance company. Design/methodology/approach The authors construct a contingent claim model for the valuation of the equity of a life insurance company. Then, they extend it to model default risk measures associated with a more appropriate behavioral mode of strategic invested asset rate-setting under regulation. Findings The findings established that the optimal insurer interest margin is explicitly modeled by a spread between the loan rate and the required guaranteed rate of the company. The effect of the guaranteed rate on the insurer interest margin is positive when the barrier is low, whereas it is negative when the barrier is high. As the barrier increases, the positive effect of the guaranteed rate on the default risk is increased, the negative effect of the participation on the insurer interest margin is decreased and the positive effect of the participation on the default risk is decreased. Practical implications Several results derived that should be of interest to investors, analysts, supervising agencies and policymakers. For example, policyholders protected by increasing the guaranteed rate may create a higher risk for the life insurance company to meet its obligations. Originality/value The authors’ approach is a significant departure from the existing literature; they differentiate among path-dependent, barrier options and suggest that the life insurance company’s defaults are more commonly triggered by regulatory responses than debt default.

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