Liability-driven investments of life insurers under investment credit risk

Nick Georgiopoulos ()
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Nick Georgiopoulos: Bermuda Monetary Authority

Risk Management, 2020, vol. 22, issue 2, No 1, 83-107

Abstract: Abstract In this paper, we present a model of liability-driven investments for life insurers by assuming that equity portfolios can be wiped out by catastrophic default risk of the firms whose stock the life insurer holds. A model of trinomial defaultable asset trees is used and it is calibrated to market data, while a stochastic programming model is set up to solve for the optimal asset allocation strategy of the life insurer to ensure maximization of assets while keeping solvency at a specific confidence level. We find relatively invariant allocations with changes to default correlation, while we find that previous models without taking credit risk explicitly into account require very high volatility parameters to reproduce allocations similar to those of the model with credit risk.

Keywords: Life insurance; Stochastic programming; Asset-liability management; Credit risk (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1057/s41283-019-00055-x

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