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The Risk of Variable Annuity Guarantees and Life Insurer Capital

Baranoff Etti, Sager Thomas and Shi Bo ()
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Baranoff Etti: Department of Finance, Insurance and Real Estate, Virginia Common wealth University, Richmond, VA, United States of America
Sager Thomas: Department of Information, Risk, and Operations Management, University of Texas at Austin, Austin, TX, United States of America
Shi Bo: Department of Accounting and Finance, Morehead State University, Morehead, KY, United States of America

Asia-Pacific Journal of Risk and Insurance, 2016, vol. 10, issue 2, 155-192

Abstract: Recently, concerns have been raised about the systemic financial threat potentially posed by life insurers. In part, these concerns have arisen because of life insurer involvement in the sales of variable annuity products with put-like performance guarantees. Guarantees expose life insurers to the market risks of mutual funds that are directed by their policyholders. In 2007, U.S. policyholders held about $500 billion in variable annuity accounts subject to guarantees issued by insurers. In this study we examine life insurer management of the risks of these guarantees, with emphasis on management of capital buffers. We introduce actuarial/regulatory and exposure-based proxies for these risks. Surprisingly, we find a robust and paradoxical result. In the years immediately prior to the Great 2008 Recession, the assumption of additional guarantee risk was associated with reductions in capital (contradicting the finite risk hypothesis), ceteris paribus. The result survives the attempts of two regression models designed to uncover explanatory confounders. The result can inform the debate on systemic risk and capital adequacy for life insurers.

Keywords: variable annuities with guaranteed benefits; life insurers; capital; asset risk (search for similar items in EconPapers)
Date: 2016
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