Asset Risk Management of Participating Contracts

Asia-Pacific Journal of Risk and Insurance, Vol. 6, N°2, 2012

27 Pages Posted: 8 Feb 2017

See all articles by Carole Bernard

Carole Bernard

Grenoble Ecole de Management; Vrije Universiteit Brussel (VUB)

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Date Written: 2012

Abstract

In this paper we study the asset-liability management of an insurance company selling “participating contracts”. Participating contracts are typical insurance policies sold worldwide.

The payoff of a participating policy is linked to the portfolio or the surplus of the insurance company. We examine the impact of the choice of assets’ investment strategy on the company value, its solvency, and how well the company may meet the commitments associated with its liabilities. Four strategies are investigated and compared: a simple buy-and-hold strategy, a dynamic CPPI (Constant Proportion Portfolio Insurance), an investment in Equity Default Swaps (EDS), and a protection by ways of forward-starting puts. For example it is shown that an active protection strategy by CPPI may significantly reduce the company’s default risk but is very costly to policyholders. Our study illustrates how to compare asset management strategies and how to choose the parameters of a suitable allocation such that the policyholders’ market value is preserved and the default risk is reduced.

Keywords: Participating Contracts, CPPI, Equity Default Swap, Market Valuation

JEL Classification: G13, G22

Suggested Citation

Bernard, Carole and Le Courtois, Olivier Arnaud, Asset Risk Management of Participating Contracts (2012). Asia-Pacific Journal of Risk and Insurance, Vol. 6, N°2, 2012. Available at SSRN: https://ssrn.com/abstract=2912847

Carole Bernard

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Olivier Arnaud Le Courtois (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

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