Volume 15, Issue 1

After decades of economic expansion, China is transitioning to meet the insurance needs of its aging and increasingly affluent population. Of particular interest to insurers and reinsurers is China’s life insurance industry, which is likely to be globally significant due to its size and scale of opportunity. The long term nature of life insurance will also see it play a key role in China’s financial and capital markets. By uniquely accounting for demographic, economic and insurance-specific factors, we estimate the long term size of China’s life insurance market, giving an important indication of the scale of its future influence.

Hurricane bonds are parametric in nature as they have a dual-exercise structure: the first exercise is conditional on the hurricane’s physical landfall location and the second is conditional upon the embedded option ending in-the-money. We propose a coupled and physically-based hurricane bond pricing model via Monte Carlo simulation that resolves the dual exercise, which was not addressed in extant loss-based catastrophe bond pricing models. This coupled model is developed at the nexus of atmospheric science and finance by integrating hurricane risk modeling and option pricing. By applying this model to price a parametric hurricane bond, we demonstrate how a hurricane bond’s price is sensitive to its underlying hurricane’s physical parameters – genesis, heading, translation speed, velocity, and radius.

There are two main equity release plans for retirement financing: reverse mortgage plan and home reversion plan. Both plans entitle the homeowners not only to release cash from their properties but also to allow them living there for life. In the lease buyback scheme (LBS) recently introduced in Singapore, the home owner sells the tail-end of the property lease to the government in exchange for a cash payment upfront. Unlike the two main equity release plans, the LBS only allows the owner to stay in the property for the front part of the lease but not for life. In this paper, we propose a hybrid home equity release plan that incorporates features of the home reversion plan and the LBS. We provide an actuarial framework to analyze the pricing of the hybrid plan, as well as the LBS and home reversion plan. Some numerical illustrations are presented to show the actuarial values of the plan under different choices of plan parameters, such as the lease period and the portion of property value sold. The hybrid plan provides enhanced flexibility to plan takers to meet their retirement needs.

In this paper, we construct new valuation schemes for the liabilities and economic capital of insurance companies. Specifically, we first build a ‘SAHARA’ valuation framework based on Symmetric Asymptotic Hyperbolic Absolute Risk Aversion utility functions. Then, we construct a ‘SAHARA-CPT’ framework that incorporates the previous utility function as a value function and that is based on Cumulative Prospect Theory. The process used for assessing a life insurance company’s own funds consists in replacing the market-consistent parametrization with a utility-consistent parametrization that accounts for the risk aversion of the market and the long-term duration of the company’s commitments. Our illustrations show that this approach leads to a lower value of the Own Risk and Solvency Assessment and to a lower volatility of own funds. The framework that is based on cumulative prospect theory has the advantage over the expected utility theory framework that it considers a precautionary overweighting of extreme events, as a tradeoff for additional model complexity.

The purpose of this research is to evaluate the new Japanese Bonus–Malus System (BMS 2012) in automobile insurance, which is an unusual system wherein both no-claim and claimed subclasses exist. To evaluate BMS 2012, we conduct a simulation analysis and compare BMS 2012 with the former Japanese BMS (BMS 2009) in terms of the present value of the total insurance premium that is closely related to the frequency of insurance claims. Based on the comparison, our main conclusion is that BMS 2012 offers more effects to lower the frequency of insurance claims than BMS 2009 does when the policyholders’ classes in BMS are high classes that evaluate as safety drivers, time discount and/or renewal rates are relatively low, and the policyholders’ risk averseness is large.