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Consequences of the Reduction of Interest Rates on Insurance

Author

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  • Sergio Siglienti

    (Chairman, Instituto Nazionale delle Assicurazioni, SpA)

Abstract

In this paper we try to assess the impact of various policy changes on the ability of the insurance industry to preserve or increase the shareholders' value. As a proxy of shareholders value, we measure the sensitivity of ROE (Return On Equities) to three main variables i.e.: (1) Different asset allocation strategies (low and high risk investment of segregated funds). (2) Cost cutting policy (fixed and distribution costs). (3) Different floor options (minimum guaranteed from 4 to 0 percent). The ROE sensitivity is estimated through a Monte Carlo simulation, where we assume that the portfolio is invested in three total return market indices. The typical portfolio in the simulations is structured as follows: 5-year treasury bonds, 5-year corporate bonds, equity; and we neglect foreign exchange risk. A 10-year single premium policy, with a reimbursement only at maturity is considered. We show that a high minimum guaranteed return and the actual prevailing financial market conditions, aggressive investment policies (stocks in excess of 10–15 percent of total assets) are likely to destroy shareholders' value. Our results indicate that reduction of minimum guaranteed rates and cost cutting are imperative, and an appropriate combination of the two appears to be the best solution. The Geneva Papers on Risk and Insurance (2000) 25, 63–77. doi:10.1111/1468-0440.00049

Suggested Citation

  • Sergio Siglienti, 2000. "Consequences of the Reduction of Interest Rates on Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(1), pages 63-77, January.
  • Handle: RePEc:pal:gpprii:v:25:y:2000:i:1:p:63-77
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    Citations

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    Cited by:

    1. Ana M. Reyna & Hugo J. Fuentes & José A. Núñez, 2022. "Response of Mexican life and non-life insurers to the low interest rate environment," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(2), pages 409-433, April.
    2. Consiglio, Andrea & Cocco, Flavio & Zenios, Stavros A., 2008. "Asset and liability modelling for participating policies with guarantees," European Journal of Operational Research, Elsevier, vol. 186(1), pages 380-404, April.
    3. Andrea Consiglio & Flavio Cocco & Stavros A. Zenios, 2001. "The Value of Integrative Risk Management for Insurance Products with Guarantees," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 2(3), pages 6-16, February.
    4. Kablau, Anke & Weiß, Matthias, 2014. "Wie wirkt sich das Niedrigzinsumfeld auf die Solvabilität der deutschen Lebensversicherer aus?," Discussion Papers 27/2014, Deutsche Bundesbank.
    5. Grochola, Nicolaus & Browne, Mark Joseph & Gründl, Helmut & Schlütter, Sebastian, 2021. "Exploring the market risk profiles of U.S. and European life insurers," ICIR Working Paper Series 39/21, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    6. Robert N. Killins & Haiwei Chen, 2022. "The impact of the yield curve on the equity returns of insurance companies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1134-1153, January.
    7. Kablau, Anke & Weiß, Matthias, 2014. "How is the low-interest-rate environment affecting the solvency of German life insurers?," Discussion Papers 27/2014e, Deutsche Bundesbank.

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