Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers

24 Pages Posted: 29 May 2012

See all articles by Maathumai Nirmalendran

Maathumai Nirmalendran

affiliation not provided to SSRN

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR)

Date Written: May 28, 2012

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.

Keywords: life annuity, insurance regulation, solvency, longevity risk

JEL Classification: G22, G23, G28, G32

Suggested Citation

Nirmalendran, Maathumai and Sherris, Michael and Hanewald, Katja, Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers (May 28, 2012). UNSW Australian School of Business Research Paper No. 2012 AIPAR 05. Available at SSRN: https://ssrn.com/abstract=2069594 or http://dx.doi.org/10.2139/ssrn.2069594

Maathumai Nirmalendran (Contact Author)

affiliation not provided to SSRN

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

School of Risk & Actuarial Studies
UNSW Sydney
Sydney, New South Wales NSW 2052
Australia

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