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Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers

Maathumai Nirmalendran (), Michael Sherris () and Katja Hanewald ()
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Maathumai Nirmalendran: Finity Consulting
Michael Sherris: School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales

No 201213, Working Papers from ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales

Abstract: This paper provides a detailed quantitative assessment of the impact of solvency capital requirements on product pricing and shareholder value for a life insurer. A multi-period firm value maximization model for a life annuity provider, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive optimal capital and pricing strategies for a range of solvency levels reflecting differences in regulatory regimes. The model is calibrated using realistic assumptions and the sensitivity of results assessed. The results show that value-maximizing insurers should target higher solvency levels than the Solvency II regulatory 99.5% under assumptions of reasonable levels of policyholder's aversion to insolvency risk. Even in the case of less restrictive solvency regulation, policyholder price elasticity and solvency preferences are shown to be important factors for a life insurer's profit maximizing strategy.

Keywords: Life annuity; insurance regulation; solvency; longevity risk (search for similar items in EconPapers)
JEL-codes: G22 G23 G28 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias
Date: 2012-05
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http://cepar.edu.au/media/80542/wp_14_solvency_cap ... d_capitalization.pdf First version, 2012 (application/pdf)
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