Currency Uncertainty, Interest Guarantee, and Risk-Based Premiums in Life Insurance Guaranty Schemes

Chang Shih-Chieh Bill () and Lee Yen-Kuan ()
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Chang Shih-Chieh Bill: Department of Risk and Insurance, National Chengchi University, Taipei, Taiwan
Lee Yen-Kuan: Department of Risk and Insurance, National Chengchi University, Taipei, Taiwan

Asia-Pacific Journal of Risk and Insurance, 2020, vol. 14, issue 2, 30

Abstract: This paper investigates risk-based premiums in ex-ante insurance guaranty schemes. Exchange rate risk is incorporated into the asset portfolio to reflect the growing practice of life insurers taking offshore risks for yield enhancement. The closed-form solutions of the risk-based premium charged by the insurance guaranty fund are derived. Our premium rating includes currency mismatches between assets and liabilities, and the effects of early closure, capital forbearance, and grace periods are fully explored. First, we discover that the insurance guaranty fund premium is underestimated if currency fluctuation uncertainty is overlooked. Second, the premium is higher under regulatory forbearance than it is under the Merton stock put option, which implies that the cost is substantial. Finally, we note that the premium increases with higher financial leverage and greater foreign exposure in the asset portfolio. The results of our analysis provide further insight for regulators to implement regulatory policies and insurance guaranty schemes.

Keywords: exchange rate risk; insurance guaranty fund; early closure; capital forbearance; grace period (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/apjri-2019-0035

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