Department of Economics and Business Economics

Asset and Liability Composition in Participating Life Insurance: The Impact on Shortfall Risk and Shareholder Value

Research output: Working paperResearchpeer-review

  • Nadine Gatzert, Friedrich-Alexander-University Erlangen-Nuremberg, Germany
  • Alexander Bohnert, Friedrich-Alexander-University Erlangen-Nuremberg, Germany
  • Peter Løchte Jørgensen
Management decisions regarding the asset and liability composition of a life insurance company can have a substantial impact on an insurer’s risk situation. At the same time, they also affect the fair risk-adjusted compensation offered to the company’s equity holders for providing capital that supports the life insurer’s various types of guarantees and surplus participation schemes. The aim of this paper is to analyze the impact of asset and liability composition in life insurance including decisions regarding the product portfolio composition, the riskiness of the asset side, and different surplus appropriation schemes on the company’s shortfall risk and the shareholders’ fair risk charge. The range of products comprises temporary life annuities and endowment insurance contracts with varying surplus appropriation schemes that are modeled actuarially. We thereby also account for mortality risk and ensure a fair situation for shareholders. Our findings emphasize that management decisions can have a substantial impact on the company’s shortfall risk, and that their effectiveness in risk reduction varies substantially depending on the surplus appropriation scheme offered to the customer, which thus poses an important control variable for the insurer
Original languageEnglish
PublisherSocial Science Research Network
Number of pages29
Publication statusPublished - 30 May 2012

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