Volume 8, Issue 1 -

This paper contributes to a better understanding of the risks involved in a life annuity investment. We study the full distribution of weighted annuity benefits and quantify risk measures such as dispersion and skewness, thereby extending the usefulness of the popular money’s worth valuation framework for life annuities. Using data from pension annuities in Singapore, we also introduce several risk measures that might appeal to less financially sophisticated retirees. A more detailed and accurate picture of the risk of investing in life annuities emerges, enabling prospective annuitants to differentiate among products that may appear seemingly uniform in terms of money’s worth, but vary widely in terms of their risk attributes.

The increasing aging population and social security insufficiency have become serious problems in China. Some developed countries, such as the U.S., Canada, and Japan, have developed reverse mortgage markets as solutions for the aging problem. In this article, a theoretical analysis of the welfare and asset allocation effects from introducing a reverse mortgage market into China, with the overlapping generation model and parameters from Chinese factors, was carried out. The results show that the introduction of a reverse mortgage market improved individual and social welfare. It provides more income for both the older and the younger generations. For the older generation, this can reduce the burden on social security; for the younger generation, this can smooth out lifetime consumption for the individual. By making comparisons among different scenarios, this article shows that the welfare effects from a reverse mortgage market would increase with the aging level of society.

This paper examines the firm-specific factors determining the use of derivatives by the sample of Japanese life and non-life Japanese insurance companies during the period of 2001–2011. We find that the participation rate for the use of derivatives by insurance companies in Japan is 73.2%, much higher than those found in the US, the UK, or Australia. Using the Probit and Tobit regression models, we provide evidence that the decision to use derivatives of Japanese insurance companies is positively related to firm size, leverage, organizational form, and proportion of assets invested in stocks and bonds, but negatively associated with reinsurance dependence. We also find that the decision of Japanese insurance companies to extend their markets by operating globally increases the need for derivatives contracts.

In recent years, we have witnessed increasing acceptance of embedded value (EV) reporting as the most robust measure of shareholder value for life and health insurance businesses. Therefore, the Commissioner of Insurance in Israel decided to request insurance companies to disclose the EV of their life, pension and health insurance business annually, beginning with the annual statements for FY 2007. Even though the insurance and financial community expected the publication of the EV data and emphasized its importance, the reaction of the capital market seemed to ignore the EV data. All things being equal, if an insurer is writing profitable new business, its market capitalization should exceed its EV. However, the market capitalization of all listed insurance companies in Israel is far below their reported EV, and the gap is growing. The purpose of this article is twofold: (a) to suggest several explanations for this apparent EV “puzzle,” both competing and complementary; (b) to argue that although the question of whether the EV report and market-consistent EV methodology really indicate the fair value of the insurance company remains controversial, the EV report contains data that give better insights into the forces driving operating performance and the impact of management actions. “The EV analysis should also be considered when evaluating management performance and remuneration schemes.”

Mortality models are fundamental to quantify mortality/longevity risks and provide the basis of pricing and reserving. In this article, we consider a family of mortality jump models and propose a new generalized Lee–Carter model with asymmetric double exponential jumps. It is asymmetric in terms of both time periods of impact and frequency/severity profiles between adverse mortality jumps and longevity jumps. It is mathematically tractable and economically intuitive. It degenerates to a transitory exponential jump model when fitting the US mortality data and is the best fit compared with other jump models.

In a complex global business environment, more organizations are relying on offshoring to provide critical information technology services (ITS). While there can be substantial cost savings for the offshoring firm, the decision to offshore ITS involves a considerable degree of uncertainty and it is essential to understand the issues and hurdles that will be faced by the offshoring operation. Based on a sample of 189 firms from 34 industries (with most coming from the Asia-Pacific region) that have made at least one offshoring decision, we find that larger market capitalized firms are more likely to outsource offshore than smaller firms. Our results also indicate an initial decrease in downside risk with a diminution in the decline, as offshore intensity increases. We also find some evidence of offshoring’s contribution to growth premia. In considering contingencies to adopt in order to manage downside risk, a real-options framework is discussed. Our findings support the view of offshoring as a dynamic process firms use to create value by leveraging growth options and mitigating risk. By considering the real-options possibilities, the investor gets a better picture of the potential losses and gains which should lead to more prudent IT offshoring investment decisions.