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Is Fair Pricing Possible? An Analysis of Participating Life Insurance Portfolios
Author(s) -
OrozcoGarcia Carolina,
Schmeiser Hato
Publication year - 2019
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12223
Subject(s) - insolvency , bankruptcy , actuarial science , equity (law) , pooling , face value , business , economics , put option , finance , artificial intelligence , political science , computer science , law
Abstract Pooling individual customers with different inception dates into a single legal entity may generate intergenerational subsidies that are accentuated when the insurer has limited liability. This article aims to investigate whether an insurer can charge fair premiums while simultaneously ensuring identical levels of default risk—measured by the value of the default put option ratio—for all generations. The decision variables for achieving these goals are asset allocation and the amount of the insurer's equity capital. We propose an accounting framework where the insurer controls for insolvency positions annually after the first contract is issued. Additionally, a run‐off framework is developed where the insurer does not declare bankruptcy in case of an insolvency, but instead stops issuing new policies and runs the company until the assets are exhausted or the last policyholder is paid. We find that intergenerational subsidies and different levels of default risk per generation cannot be avoided whenever we face a positive default risk. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark