The Impact of Disability Insurance on a Portfolio of Life Insurances

Alexander Maegebier and Nadine Gatzert

North American Actuarial Journal, 2016, vol. 20, issue 2, 142-159

Abstract: The aim of this article is to study the impact of disability insurance on an insurer's risk situation for a portfolio that also consists of annuity and term life contracts. We provide a model framework using discrete time nonhomogeneous bivariate Markov renewal processes and in a simulation study focus on diversification benefits as well as potential natural hedging effects (risk-minimizing or risk-immunizing portfolio compositions) that may arise within the portfolio because of the different types of biometric risks. Our analyses emphasize that disability insurances are a less efficient tool to hedge shocks to mortality and that their high sensitivity toward shocks to disability risks cannot be easily counterbalanced by other life insurance products. However, the addition of disability insurance can still considerably lower the overall company risk.

Date: 2016
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DOI: 10.1080/10920277.2015.1109457

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