Volume 14, Issue 1 -

This paper describes an online solution for visualizing the simulation of a discrete time Markov chain using an animated graph. Based on the D3.js library, the development of this solution offers the user the choice between a presentation based on the concept of a probabilistic graph oriented and a presentation of the transitions in a matrix framework. As an application the solution helps to describe the dynamics of individual policyholders in a Bonus-Malus system of automobile insurance.

Equity-Indexed Annuity products (EIAs) are becoming increasingly popular as they are accumulation vehicles that offer participation in the equity market growth while keeping the initial capital protected. This paper focuses in particular on a special type of EIAs; the Compound Ratchet (CR). Sellers of this product retain the right to change one of the pricing parameters on each contract anniversary date while promising not to cross a certain predetermined threshold. Changing these parameters can sometimes have an impact on the value of the EIA, which makes them interesting to study. In order to reproduce the pattern of these changing parameters, a new approach of dynamically hedging the CR EIA and simultaneously protecting the issuer from hedging risk is proposed and tested. Trading can only be done in discrete time, which produces hedging errors. Therefore, the new approach is applied to transfer these errors from the issuer to the buyer by dynamically changing the pricing parameters. The distribution of these parameters is extracted and analyzed.

In the context of measuring economic performance, efficiency and productivity of Indian life insurance firms, there are studies using the Data Envelopment Analysis (DEA) methodology. In this paper, the difference between the quantity based approach and value based approach is highlighted and elaborated using data of Indian life insurers operational over the period 2005–06 to 2015–16. There are both advantages and disadvantages of using DEA, as highlighted in the theoretical literature. In particular, the efficiency estimates are heavily influenced by the selection of inputs and outputs. This study provides an insight on technical efficiency and innovates in terms of data use and is the first study on the Indian insurance industry to compute cost and allocative efficiencies. Four hypotheses were tested in the study. First, there were initially improvements in efficiency but in recent years, clearly there is stagnation. Second, the results support views of Tone and Sahoo (2005)  and Sen (2010), that the public life insurer, the Life Insurance Corporation of India is cost inefficient. The private life insurers need to reallocate resources to improve overall efficiency. LICI was found to be technically efficient but remained cost inefficient. Third, the traditional Farrell based cost efficiency estimates are significantly different from Tone (2002) alternative approach. Therefore, choice of estimation method is important. Fourth, non-discretionary factors such as age, premium growth and size of the insurers along with regulations pertaining to solvency affect cost efficiency. Key financial ratios such as expense ratio, commission ratio, conservation ratio and persistency ratio, and retention ratio are used to statistically establish their relationship with the different efficiency estimates. Results also show that entry of a new insurer may negatively affect cost efficiency of an existing insurer but foreign equity could positively improve cost efficiency.

A persistent low-interest-rate environment has had a notable impact on the life insurance industry. For reducing the negative interest-rate spread problems, Taiwan life insurer’s asset allocation shift to international diversifies. In this paper, overseas investment is incorporated into the asset portfolio to reflect the growing practice of life insurers taking offshore risks for yield enhancement. We calibrate contract parameters and surplus distribution is investigated through feasible hedge strategies. Foreign-exchange volatility reserves, forward hedge, and basket hedge are compared based on the shortfall measures under risk-neutral valuation. The shareholder’s claim and default put options are compared. The numerical results show that FX volatility reserves are the most effective instrument for controlling currency risk, followed by basket hedge. By contrast, fully forward hedge is cost enhanced and might not generate the advantage of carry trade.

This article re-examines three standard results in the theory of insurance demand: (i) full coverage with a fair premium and partial coverage with an unfair premium; (ii) insurance is an inferior good under decreasing absolute risk aversion (DARA) and (iii) insurance may be a Giffen good under DARA. It has been shown recently that (i) holds for the class of insurance policies in which maximum coverage fully covers the potential loss. We show that whether (i) holds beyond this class of policies is indeterminate. In addition, we employ a unified framework to investigate the effects of changes in initial wealth and price. In particular, we show that both (ii) and (iii) hold for a certain class of insurance policies which include all commonly-used types of policies. The result also provides a unified treatment of several results in the extant literature.

This paper questions how heterogeneity of beliefs about the probability of loss affects equilibrium insurance contracts, firm behavior, and welfare focusing especially on the effect of optimism when a monotonicity property, which is a major assumption of prior work, is violated. This paper shows that optimistic individuals could result in insurance driving out individuals who exert effort, if the fraction of such optimistic individuals is significantly large. In addition, this paper shows that optimism could have negative effects on profits of the firm even though both parties realize the asymmetry in beliefs. These results are not only consistent with empirical evidence from several insurance markets on correlation of risk and coverage, but also simply align themselves with empirical evidence on the tendencies of people to be unrealistically optimistic.

This study investigates whether the use of captive insurers affects firm value for companies included in the S&P 500. Companies may use a captive insurance subsidiary to retain their risks for a lower cost than they would pay in premiums to a third-party insurer. Although captives are present in more than one-third of all firm-years between 2000 and 2016, this study fails to find evidence that owning a captive increases firm value effectively. Additional analysis reveals that firms that are larger, are listed on the New York Stock Exchange (NYSE), and have smaller proportions of capital expenditures and cash reserves tend to use captives. Overall, the results are inconsistent with previous research indicating that the market reacts positively to captive formation around the formation date. This suggests that incentives other than shareholder value maximization may have encouraged the use of captives during the sample period.

The Hong Kong Mortgage Corporation (HKMC) Limited, which was established in March 1997 and is wholly owned by the government of the Hong Kong Special Administrative Region, has a major mission to develop and provide different financial retirement instruments to Hong Kong residents to help address the income poverty of retirees. In June 2017, HKMC Annuity Limited, a wholly-owned subsidiary of the HKMC was incorporated to implement a new life annuity scheme which would be launched by mid-2018 to cater for the needs of cash-rich Hong Kong old age residents. The objective of the scheme is to provide an additional financial retirement planning option with minimum credit risk and a certain level of liquidity to the elderly by turning lump-sum premiums into lifetime streams of monthly income at a reasonable and stable return rate. In this paper, we establish an actuarial framework to model this life annuity scheme. The framework enables us to estimate the monthly annuity payments one might receive for a certain amount of investment. It also allows us to analyze the risk entailed in the product, thus shedding light on how the underlying risk can be managed through product design. Our findings will help potential subscribers to understand the scheme and decide whether this scheme should be included in their retirement investment portfolios when it is launched in 2018.