The Risk of Variable Annuity Guarantees and Life Insurer Capital

2016 ◽  
Vol 10 (2) ◽  
Author(s):  
Etti Baranoff ◽  
Thomas Sager ◽  
Bo Shi
Keyword(s):  
Mutual Funds ◽  
Life Insurers ◽  
Performance Guarantees ◽  
Market Risks ◽  
Paradoxical Result ◽  
Life Insurer ◽  
Financial Threat

AbstractRecently, concerns have been raised about the systemic financial threat potentially posed by life insurers. In part, these concerns have arisen because of life insurer involvement in the sales of variable annuity products with put-like performance guarantees. Guarantees expose life insurers to the market risks of mutual funds that are directed by their policyholders. In 2007, U.S. policyholders held about $500 billion in variable annuity accounts subject to guarantees issued by insurers. In this study we examine life insurer management of the risks of these guarantees, with emphasis on management of capital buffers. We introduce actuarial/regulatory and exposure-based proxies for these risks. Surprisingly, we find a robust and paradoxical result. In the years immediately prior to the Great 2008 Recession, the assumption of additional guarantee risk was associated with reductions in capital (contradicting the finite risk hypothesis),

Determinants of Derivative Usage in the Life and General Insurance Industry: The Australian Evidence

2003 ◽  
Vol 06 (04) ◽  
pp. 405-431 ◽  
Author(s):  
Marc De Ceuster ◽  
Liam Flanagan ◽  
Allan Hodgson ◽  
Mohammad I. Tahir
Keyword(s):  
Life Insurance ◽  
Insurance Industry ◽  
Cost Effective ◽  
Insurance Companies ◽  
Long Tail ◽  
Life Insurers ◽  
Market Risks ◽  
Life Insurance Industry ◽  
General Insurance ◽  
Standard Operating

Core business and financial market risks are not easily reduced by standard operating procedures in insurance companies. Derivatives theoretically provide a cost effective vehicle to hedge these risks. This paper provides an empirical analysis of the determinants of derivative usage as well as the extent of derivative usage in the Australian insurance industry in both life and general insurance companies for the period 1997–1999. Empirical results for the Australian life insurance industry in general confirm the findings of UK and US based research. However, the Australian general insurance industry does not appear to follow the conclusions of previous literature. Our results indicate that for life insurers, the determinants of derivative usage were size, leverage and reinsurance. For the general insurance industry the determinants were size and the extent of long tail lines of business written. As regards the determinants of the extent of derivative usage, these were size and asset-liability duration mismatches for life insurers. For the general insurance industry the determinants of the extent of derivative usage were size, the extent of long tail lines of business written, and the reporting year.

scholarly journals Tenacity in Performance of Small and Mid-cap Mutual Funds in Indian Scenario- In support to Investors Decision

2020 ◽  
Vol 9 (1) ◽  
pp. 1088-1091
Keyword(s):  
Decision Making ◽  
Comparative Analysis ◽  
Mutual Funds ◽  
Crucial Role ◽  
Large Scale ◽  
Small Scale ◽  
The Past ◽  
Market Risks ◽  
Support Decision Making ◽  
Indian Scenario

Mutual funds play a crucial role in financial sector for small-scale and large-scale investors. Within the Indian scenario, there is a need to define criteria to guide the investors in selection between small-caps and mid-caps mutual funds. Although small-caps provide there is always a question of higher market risks compared to mid-caps. So, the work emphasizes on analysis performances of Small caps in comparison with mid-caps that would certainly support decision-making. In the present work a comprehensive assessment of existing mutual funds that involves small and mid-cap with respect to Indian scenario is presented and their performance in the market for the past ten years is analyzed. The study analyses the fund’s performance by considering parameters like market risk, momentum, expenses, size and value. The persistence and decision-making of the investor are discussed with respect to the small and mid-cap funds. In this regard, we have considered the best and worst-performing small and mid-cap funds according to their returns in a overall span of more than 3 years. A comparative analysis between the decision making parameters that are performing and underperforming during this period are considered. In this study, small-caps funds like HDFC small-cap fund, Kotak, DSP small Cap fund and Franklin India Small MF and in parallel, mid-cap funds including Kota Emerging equity, DSP Midcap and Axis Midcap and Franklin India are considered

scholarly journals The Importance of the Efficiency of Mutual Life Insurers: A Comparison to Stock Life Insurers

2020 ◽  
Vol 20 (1) ◽  
pp. 474-505
Author(s):  
William Wise
Keyword(s):  
Life Insurance ◽  
Research Methodology ◽  
Insurance Industry ◽  
Insurance Companies ◽  
Economic Problems ◽  
Life Insurers ◽  
Life Insurance Industry ◽  
Life Insurer ◽  
The One ◽  
Total Stock

AbstractResearch background: Mutual companies are a major component of the life insurance industry worldwide and moreover are growing in importance. Efficiency, potentially affected by whether a life insurer company is mutual or stock, can determine how well said companies perform.Purpose: The aim of this paper is to demonstrate the importance of examining the efficiency of mutual and takaful (similar to mutuals) life insurance companies.Research methodology: This research coordinates 1) ideas regarding the size and importance of the mutual and takaful life industries worldwide, 2) theoretical aspects concerning how the efficiency of mutual/takafuls is expected to compare to that of stock insurers and 3) the outcomes of germane life insurance efficiency studies.Results: The outcomes of life insurance efficiency studies tend to show that, in total, stock insurers are more efficient than mutuals apart from one conspicuous element. As mutuals are substantial within several of the world’s largest life markets and the global life industry their being inefficient can be exceedingly negative. The overall conclusion is that such inefficiency can lead to dire economic problems so it is imperative to investigate the efficiency of mutuals/takafuls and perhaps the one element of stocks.Novelty: This article is the first to investigate the results of mutual/takaful life insurer efficiency studies in concert with the abovementioned theory and draws a vital conclusion regarding mutual/takaful life insurer inefficiency.

scholarly journals The Negative Impact of COVID-19 on Life Insurers

2021 ◽  
Vol 9 ◽  
Author(s):  
Xun Zhang ◽  
Pu Liao ◽  
Xiaohua Chen
Keyword(s):  
Negative Impact ◽  
The United States ◽  
Interest Rate Risk ◽  
Base Case ◽  
Financial Sustainability ◽  
Life Insurers ◽  
Force Of Mortality ◽  
Jump Model ◽  
Mortality Effect ◽  
Life Insurer

Understanding COVID-19 induced mortality risk is significant for life insurers to better analyze their financial sustainability after the outbreak of COVID-19. To capture the mortality effect caused by COVID-19 among all ages, this study proposes a temporary adverse mortality jump model to describe the dynamics of mortality in a post-COVID-19 pandemic world based on the weekly death numbers from 2015 to 2021 in the United States. As a comparative study, the Lee-Carter model is used as the base case to represent the dynamics of mortality without COVID-19. Then we compare the force of mortality, the survival probability and the liability of a life insurer by considering COVID-19 and those without COVID-19. We show that a life insurer's financial sustainability will deteriorate because of the higher mortality rates than expected in the wake of COVID-19. Our results remain unchanged when we also consider the effect of interest rate risk by adopting the Vasicek and CIR models.

Non-traditional investments: key considerations for insurers

2015 ◽  
Vol 20 (3) ◽  
pp. 528-552
Author(s):  
G. Mee
Keyword(s):  
Working Party ◽  
Investment Strategies ◽  
Economic Success ◽  
Life Insurers ◽  
Specific Investments ◽  
Life Insurer ◽  
Potential Benefits ◽  
Asset Classes ◽  
The Many ◽  
Investment Advice

AbstractLife insurers have historically relied upon investment markets as a key source of profit and crucially have been able to do this while embarking on relatively “vanilla” investment strategies. In the current low-yield environment, broadening their investment horizons is critical to maintaining profitability. This paper summarises some relevant external literature and the working party’s own research in understanding the potential benefits and pitfalls for insurers seeking to invest in non-traditional assets. The objective of this paper is to help educate and promote understanding by all (the many) relevant parties. In doing so, we hope to help organisations to achieve some further economic success for the ultimate benefit of society. Although this paper has primarily been written from the perspective of a life insurer, we hope it will be of interest to a much wider audience. Many of the asset classes considered here are relevant to general insurers, pension funds and the wider capital markets. It is very important to note that this paper does not contain investment advice and the analysis represents the views of the individuals and the working party and not the companies which they represent or the Profession. This paper does not make any comment as to the suitability (or otherwise) of specific investments for particular investors.

scholarly journals Dealing with Low Interest Rates in Life Insurance: An Analysis of Additional Reserves in the German Life Insurance Industry

2019 ◽  
Vol 12 (3) ◽  
pp. 119
Author(s):  
Eckert
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Life Insurance ◽  
Insurance Industry ◽  
Suitable Alternative ◽  
Life Insurers ◽  
Simulation Techniques ◽  
Life Insurer ◽  
Low Interest Rates ◽  
German Life

Interest rates have been very low for several years, which is particularly challenging for life insurers. Since 2001, German life insurers have had to set an additional reserve due to low interest rates to ensure the protection of policyholders. However, the method introduced at that time to calculate these reserves was criticized, therefore, the German Federal Ministry of Finance replaced it with a new approach. In this article, we investigated the effects of the different methods on a typical German life insurer in various future interest rate scenarios and from various perspectives. For this purpose, we modelled such a life insurer holistically, considered its asset liability management and projected its future development in different interest rate scenarios using simulation techniques. Taking into account dependencies between assets, liabilities and interest rates, we analyzed and discussed our results from the life insurer’s, equity holders’, policyholders’ and regulators’ perspectives. The results show that the new method eliminated the weaknesses of the previous one and seems to be a suitable alternative to determine the additional reserve.

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