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European Actuarial Journal
Erschienen in: European Actuarial Journal 1/2017

14.12.2016 | Original Research Paper

Runoff or redesign? Alternative guarantees and new business strategies for participating life insurance

verfasst von: Jochen Wieland

Erschienen in: European Actuarial Journal | Ausgabe 1/2017

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Abstract

Portfolios of traditional participating life insurance contracts with year-to-year (cliquet-style) guarantees are under pressure in the current situation of persistently low interest rates when valued in a market consistent valuation framework. For a portfolio with a fixed technical interest rate it has been shown in Reuß et al. (Innov Quant Risk Manag 99:185–208, 2015) that product designs with alternative guarantees are able to reduce the insurers risk and increase capital efficiency. The objective of this paper is to analyze interactions between new contracts and an existing book of insurance contracts. We consider an insurer that has built up a portfolio in the past under changing guaranteed interest rates and market conditions. Then, we analyze different new business strategies for this insurer and the resulting risk exposure and capital requirement. We show that—if all contracts are covered by the same pool of assets—switching to carefully designed participating contracts with alternative guarantees is typically preferable to a runoff scenario and can substantially reduce financial risk in future years.
Vorheriger Artikel Market inconsistencies of market-consistent European life insurance economic valuations: pitfalls and practical solutions
Nächster Artikel Allowance for surplus funds under Solvency II: adequate reflection of risk sharing between policyholders and shareholders in a risk-based solvency framework?

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Fußnoten
1
Since 2011 German life insurers have to set up an additional reserve (so-called “Zinszusatzreserve”) for contracts with a technical interest rate above a certain reference rate. This reference rate is updated every year by a prescribed mechanism based on Euro swap rates of the current and previous years (cf. “Deckungsrckstellungsverordnung” (DeckRV), §5), and amounts to 2.88% for year-end 2015.
 
2
For example, Zurich Deutscher Herold Lebensversicherung stopped new business in participating life insurance in 2013, and now offers so-called “select products”. Generali Deutschland announced in a press release in May 2015 their target to discontinue participating life insurance and focus on offering unit-linked insurance. The Talanx group announced in July 2015 to sell new business from the end of 2016 on only with a return-of-premium guarantee (instead of a guaranteed interest rate). Even though such announcements are perceived in public often as a full withdrawal from traditional participating contracts, the new product strategies are mostly redesigned traditional contracts that are similar to the concepts discussed in Reuß et al. [25] and Alexandrova et al. [1].
 
3
Cf. EIOPA [11], Article 45.
 
4
However, mortality influences the development of the modeled insurance portfolio (explained in the following sections), and is therefore taken into account for the projections.
 
5
Annual surplus is typically credited to such policies according to country specific regulation. In Germany, at least 90% of the (local GAAP book value) investment income on the insurer’s assets has to be credited to the policyholders’ accounts. Please note that it is not within the scope of this paper to analyze if European regulators would agree with the alternative products (and the surplus distribution applied to them) as they are presented here, or if certain restrictions would be imposed. However, in the insurance supervision laws e.g. in Austria and Switzerland regulations have been included that definitely allow product designs like the Alternative 1 product presented in this paper (cf. e.g. “Versicherungsaufsichtsgesetz 2016” (VAG 2016), §92 for Austrian regulation).
 
6
This definition makes sure that the account value remains non-negative, never falls below the actuarial reserve and earns at least the year-to-year guaranteed interest rate.
 
7
Further explanations on the applied asset-liability model are given in Reuß et al. [25, 26].
 
8
As in Reuß et al. [25] we do not explicitly consider the shareholders’ equity or other reserves on the liability side since our analyses for the insurance portfolio are performed on a stand-alone basis.
 
9
As stated in Reuß et al. [25], p. 196: ’We do not consider the shareholders’ default put option resulting from their limited liability, which is in line with both, Solvency II valuation standards and the Market Consistent Embedded Value framework (MCEV), cf. Bauer et al. [4]; CFO-Forum [9], G7.2 and DAV [10], section 5.3.4.’
 
10
The valuation dates are generally set at the beginning of the year (and not at the end) to simplify the presentation of the results only. The valuation does not include new business of that year unless stated otherwise.
 
11
Note that since 2011 an additional reserve, so-called “Zinszusatzreserve” (as outlined in Footnote 1), exists under German regulation for contracts with a high technical rate which is calculated by replacing the original technical rate by a certain (lower) reference rate for a certain period of time. However, this rule is not considered in the model of this paper. We believe that in order to provide a more universal analysis (applicable also for different settings) and pure comparison of the different portfolios and product types, the effects of this country specific regulation should be left out of consideration. However, we want to point out that taking into account this additional reserve (which has been introduced to handle the current low interest rate environment) could change the surplus amount and therefore reduce risks from traditional contracts in certain scenarios, and lead to somewhat different results.
 
12
In reality, in 1994 and 2000, the maximal technical rate was changed by July 1st. Since we assume that all new contracts are sold at the beginning of the year, the rate valid until June 30th is applied for the respective years. After 2016, the maximal technical rate regulated by law might change in reality, but we will assume for our new business analyses that the insurer keeps the level from 2015 for future contracts.
 
13
Cf. Bundesbank [8].
 
14
We note that swap rates can deviate from the rates of government bonds, and are thus not fully comparable. However, for our purpose of modeling a representative insurance portfolio the difference is negligible.
 
15
Applying a risk-neutral measure is in line with the MCEV valuation principles and Solvency II standards (cf. CFO-Forum [9] and EIOPA [12]).
 
16
Cf. Vasicek [28].
 
17
Cf. Zaglauer and Bauer [29].
 
18
See Seyboth [27] as well as Branger and Schlag [6].
 
19
Cf. Oechslin et al. [24].
 
20
As in Reuß et al. [25], we apply an antithetic path selection of the random numbers in order to reduce variance in the sample, cf. e.g. Glasserman [15].
 
21
The concept of PVFP is introduced as part of the MCEV Principles in CFO-Forum [9].
 
22
Cf. CFO-Forum [9].
 
23
Compare the TVOG analyses in Reuß et al. [25].
 
24
A description of the standard formula can be found in the Delegated Regulation (EU) 2015/35 (cf. EIOPA [12]).
 
25
Note that due to mortality before 2014, the number of contracts for the different remaining times to maturity is not the same.
 
26
Cf. EIOPA [11], Article 45.
 
27
This value is derived from the par yield under risk-neutral returns in the CE scenario of the stochastic projections with basic parameters described in Sect. 2.4.
 
28
This value is derived from the par yield under risk-neutral returns in the CE scenario of the stochastic projections with stress parameters described in Sect. 2.4
 
29
Compare for example the approach in Reuß et al. [26].
 
30
See Reuß et al. [26].
 
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Kling A, Richter A, Russ J (2007) The impact of surplus distribution on the risk exposure of with profit life insurance policies including interest rate guarantees. J Risk Insur 74(3):571–589CrossRef
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Kling A, Richter A, Russ J (2007) The interaction of guarantees, surplus distribution, and asset allocation in with-prot life insurance policies. Insur Math Econ 40(1):164–178CrossRefMATH
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Miltersen K, Persson S-A (2003) Guaranteed investment contracts: distributed and undistributed excess return. Scand Actuar J 103(4):257–279MathSciNetCrossRefMATH
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Oechslin J, Aubry O, Aellig M (2007) Replicating embedded options. Life Pensions, pp. 47–52
25.
Reuß A, Ruß J, Wieland J (2015) Participating life insurance contracts under risk based solvency frameworks: how to increase capital efficiency by product design. Innov Quant Risk Manag, Springer Proceedings in Mathematics and Statistics 99:185–208
26.
Reuß A, Ruß J, Wieland J (2016) Participating life insurance products with alternative guarantees: reconciling policyholders’ and insurers’ interests. Risks 4(2):11 (Special issue: life insurance and pensions)CrossRef
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Seyboth M (2011) Der Market Consistent Appraisal Value und seine Anwendung im Rahmen der wertorientierten Steuerung von Lebensversicherungsunternehmen. PhD Thesis, University of Ulm
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Zaglauer K, Bauer D (2008) Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment. Insur Math Econ 43(1):29–40MathSciNetCrossRefMATH
Metadaten
Titel
Runoff or redesign? Alternative guarantees and new business strategies for participating life insurance
verfasst von
Jochen Wieland
Publikationsdatum
14.12.2016
Verlag
Springer Berlin Heidelberg
Erschienen in
European Actuarial Journal / Ausgabe 1/2017
Print ISSN: 2190-9733
Elektronische ISSN: 2190-9741
DOI
https://doi.org/10.1007/s13385-016-0140-0

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