IDEAS home Printed from https://ideas.repec.org/a/bpj/apjrin/v10y2016i2p155-192n4.html
   My bibliography  Save this article

The Risk of Variable Annuity Guarantees and Life Insurer Capital

Author

Listed:
  • Baranoff Etti

    (Department of Finance, Insurance and Real Estate, Virginia Common wealth University, Richmond, VA, United States of America)

  • Sager Thomas

    (Department of Information, Risk, and Operations Management, University of Texas at Austin, Austin, TX, United States of America)

  • Shi Bo

    (Department of Accounting and Finance, Morehead State University, Morehead, KY, United States of America)

Abstract

Recently, 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), ceteris paribus. The result survives the attempts of two regression models designed to uncover explanatory confounders. The result can inform the debate on systemic risk and capital adequacy for life insurers.

Suggested Citation

  • Baranoff Etti & Sager Thomas & Shi Bo, 2016. "The Risk of Variable Annuity Guarantees and Life Insurer Capital," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 10(2), pages 155-192, July.
    • Handle: RePEc:bpj:apjrin:v:10:y:2016:i:2:p:155-192:n:4
    DOI: 10.1515/apjri-2016-0001
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/apjri-2016-0001
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/apjri-2016-0001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Etti G. Baranoff & Savas Papadopoulos & Thomas W. Sager, 2007. "Capital and Risk Revisited: A Structural Equation Model Approach for Life Insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(3), pages 653-681, September.
    2. Bauer, Daniel & Kling, Alexander & Russ, Jochen, 2008. "A Universal Pricing Framework for Guaranteed Minimum Benefits in Variable Annuities 1," ASTIN Bulletin, Cambridge University Press, vol. 38(2), pages 621-651, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jin Sun & Eckhard Platen, 2019. "Benchmarked Risk Minimizing Hedging Strategies for Life Insurance Policies," Research Paper Series 399, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Wang, Gu & Zou, Bin, 2021. "Optimal fee structure of variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 587-601.
    3. Thorsten Moenig, 2021. "Efficient valuation of variable annuity portfolios with dynamic programming," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(4), pages 1023-1055, December.
    4. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris Nanterre, EconomiX.
    5. Jennifer Alonso Garcia & Michael Sherris & Samuel Thirurajah & Jonathan Ziveyi, 2020. "Taxation and policyholder behavior: the case of guaranteed minimum accumulation benefits," ULB Institutional Repository 2013/307889, ULB -- Universite Libre de Bruxelles.
    6. Jingjiang Peng & Kwai Sun Leung & Yue Kuen Kwok, 2012. "Pricing guaranteed minimum withdrawal benefits under stochastic interest rates," Quantitative Finance, Taylor & Francis Journals, vol. 12(6), pages 933-941, October.
    7. Post, Thomas, 2009. "Individual welfare gains from deferred life-annuities under stochastic Lee-Carter mortality," SFB 649 Discussion Papers 2009-022, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    8. van Haastrecht, Alexander & Plat, Richard & Pelsser, Antoon, 2010. "Valuation of guaranteed annuity options using a stochastic volatility model for equity prices," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 266-277, December.
    9. Kirkby, J. Lars & Nguyen, Duy, 2021. "Equity-linked Guaranteed Minimum Death Benefits with dollar cost averaging," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 408-428.
    10. Shen, Yang & Sherris, Michael & Ziveyi, Jonathan, 2016. "Valuation of guaranteed minimum maturity benefits in variable annuities with surrender options," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 127-137.
    11. Michael A. Kouritzin & Anne MacKay, 2017. "VIX-linked fees for GMWBs via Explicit Solution Simulation Methods," Papers 1708.06886, arXiv.org, revised Apr 2018.
    12. David Blake & Marco Morales & Enrico Biffis & Yijia Lin & Andreas Milidonis, 2017. "Special Edition: Longevity 10 – The Tenth International Longevity Risk and Capital Markets Solutions Conference," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(S1), pages 515-532, April.
    13. He, Junnan & Tang, Qihe & Zhang, Huan, 2016. "Risk reducers in convex order," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 80-88.
    14. Gan, Guojun & Lin, X. Sheldon, 2015. "Valuation of large variable annuity portfolios under nested simulation: A functional data approach," Insurance: Mathematics and Economics, Elsevier, vol. 62(C), pages 138-150.
    15. Radek Hendrych & Tomáš Cipra, 2015. "Econometric Model of the Czech Life Insurance Market," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(2), pages 173-191.
    16. Bryce, Cormac & Webb, Rob & Cheevers, Carly & Ring, P. & Clark, G., 2016. "Should the insurance industry be banking on risk escalation for solvency II?," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 131-139.
    17. Hangsuck Lee & Hongjun Ha & Minha Lee, 2022. "Piecewise linear boundary crossing probabilities, barrier options, and variable annuities," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(12), pages 2248-2272, December.
    18. Paolo Angelis & Roberto Marchis & Antonio L. Martire & Emilio Russo, 2022. "A flexible lattice framework for valuing options on assets paying discrete dividends and variable annuities embedding GMWB riders," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 415-446, June.
    19. Delong, Łukasz, 2014. "Pricing and hedging of variable annuities with state-dependent fees," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 24-33.
    20. Xiaolin Luo & Pavel V. Shevchenko, 2015. "Valuation of capital protection options," Papers 1508.00668, arXiv.org, revised May 2017.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:apjrin:v:10:y:2016:i:2:p:155-192:n:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.