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PRICING AND SOLVENCY OF VALUE-MAXIMIZING LIFE ANNUITY PROVIDERS

Published online by Cambridge University Press:  08 October 2013

Maathumai Nirmalendran ,
Michael Sherris  and
Katja Hanewald
Maathumai Nirmalendran
Affiliation:
Finity Consulting, Level 7, 155 George St, Sydney, Australia E-Mail: [email protected]
Michael Sherris*
Affiliation:
Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales, New South Wales, Australia
Katja Hanewald
Affiliation:
Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales, New South Wales, Australia E-Mail: [email protected]
*
E-Mail: [email protected]
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Abstract

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

Keywords

Life annuityinsurance regulationsolvencylongevity risk
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 44 , Issue 1 , January 2014 , pp. 39 - 61
Copyright
Copyright © ASTIN Bulletin 2013 

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