Asset/Liability Management of German Life Insurance Companies: A Value-at-Risk Approach in the Presence of Interest Rate Guarantees

Peter Albrecht () and Carsten Weber ()
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Peter Albrecht: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim
Carsten Weber : Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 03-19, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This contribution analyses the implications of two major determinants influencing the asset allocation decision of German life insurers, which are the capital market development on the one hand and the interest rate guarantees of the traditional life insurance policies on the other hand. The adverse development of the stock prices between 2000 and 2002 asks for a consideration of not only the �normal� volatility but also the worst-case developments in an asset/liability management. In order to meet the latter requirement, we technically apply the risk measures of Value-at-Risk and Conditional Value-at-Risk. German life insurance policies incorporate interest rate guarantees, which are granted on an annual basis. This specific �myopic� nature of guarantees creates � beyond the control of the shortfall risk in general � the necessity to manage the asset allocation on an annual basis to match the time horizon of assets and liabilities. A quantitative approach analyses the impacts on the asset allocation decision. In our research we do not only consider market valuation, but also institutional peculiarities (such as hidden reserves and accounting norms) of German life insurers. We reveal the possibility of a riskless one-year investment, either based on market values or on book values, to be crucial for guaranteeing interest rates on an annual basis.

Pages: 14 pages
Date: 2003-10-08
New Economics Papers: this item is included in nep-rmg
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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