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Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers

Author

Listed:
  • Maathumai Nirmalendran

    (Finity Consulting)

  • Michael Sherris

    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Katja Hanewald

    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

Abstract

This paper provides a detailed quantitative assessment of the impact of solvency capital requirements on product pricing and shareholder value for a life insurer. A multi-period firm value maximization model for a life annuity provider, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive optimal capital and pricing strategies for a range of solvency levels reflecting differences in regulatory regimes. The model is calibrated using realistic assumptions and the sensitivity of results assessed. The results show that value-maximizing insurers should target higher solvency levels than the Solvency II regulatory 99.5% under assumptions of reasonable levels of policyholder's aversion to insolvency risk. Even in the case of less restrictive solvency regulation, policyholder price elasticity and solvency preferences are shown to be important factors for a life insurer's profit maximizing strategy.

Suggested Citation

  • Maathumai Nirmalendran & Michael Sherris & Katja Hanewald, 2012. "Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers," Working Papers 201213, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    • Handle: RePEc:asb:wpaper:201213
    as

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    File URL: http://cepar.edu.au/media/80542/wp_14_solvency_capital__pricing_and_capitalization.pdf
    File Function: First version, 2012
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Life annuity; insurance regulation; solvency; longevity risk;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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