Risk-Seeking Behavior and its Implications for the Optimal Decision Making of Annuity Insurers

North American Actuarial Journal, Forthcoming

43 Pages Posted: 12 May 2021 Last revised: 30 Aug 2021

See all articles by Cuixia Chen

Cuixia Chen

Hebei Finance University

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Ming Zhou

Central University of Finance and Economics (CUFE) - China Institute for Actuarial Science

Date Written: August 17, 2021

Abstract

This study investigates risk-seeking and optimal decisions of annuity providers. On the basis of a sample of U.S. life and annuity (L/A) insurers between 1997 and 2016, the results show clear performance-dependent risk attitudes. Specifically, insurers with returns below aspiration levels take more risks, whereas those with returns above reference levels decrease their risk-seeking, which supports the basic propositions of the cumulative prospect theory (CPT). Given initial evidence of mixed risk preferences in the L/A insurance industry, we derive an annuity insurer’s optimal investment and business strategies in a CPT decision-making framework. We show that changing risk preferences considerably affect an annuity provider’s decisions. We further illustrate how risk management changes an annuity insurer’s optimal strategies. Our results suggest that risk management lowers downside risk and allows a loss-averse decision-maker to assume more risk and achieve a higher level of utility.

Keywords: cumulative prospect theory, risk-return relation, annuity business, changing risk preference, risk management

JEL Classification: G22, D03, D22

Suggested Citation

Chen, Cuixia and Lin, Yijia and Zhou, Ming, Risk-Seeking Behavior and its Implications for the Optimal Decision Making of Annuity Insurers (August 17, 2021). North American Actuarial Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3841669 or http://dx.doi.org/10.2139/ssrn.3841669

Cuixia Chen

Hebei Finance University ( email )

3188 Hengxiang North Street, Baoding City, Hebei P
Baoding, Hebei 071051
China
0312-3338051 (Phone)

Yijia Lin (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Ming Zhou

Central University of Finance and Economics (CUFE) - China Institute for Actuarial Science ( email )

39 South College Road, Haidian
Beijing, 100081
China

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