On risk charges and shadow account options in pension funds

This paper studies the economic implications of regulatory systems which allow equityholders of pension companies to not only charge a specific premium to compensate them for their higher risk (compared to policyholders), but also to accumulate these risk charges in a so-called shadow account in years when they are not immediately payable due to e.g. poor investment results. When surpluses are subsequently reestablished, clearance of the shadow account balance takes priority over bonus/participation transfers to policyholders. We see such a regulatory accounting rule as a valuable option to equityholders and our paper develops a model in which the influence of risk charges and shadow account options on stakeholders’ value can be quantified and studied. Our numerical results show that the value of shadow account options can be significant and thus come at the risk of expropriating policyholder wealth. However, our analysis also shows that this risk can be remedied if proper attention is given to the specific contract design and to the fixing of fair contract parameters at the outset.     

The drivers and value of enterprise risk management: evidence from ERM ratings

In the course of recent regulatory developments, holistic enterprise-wide risk management (ERM) frameworks have become increasingly relevant for insurance companies. The aim of this paper is to contribute to the literature by analyzing determinants (firm characteristics) as well as the impact of ERM on the shareholder value of European insurers using the Standard & Poor’s ERM rating to identify ERM activities. This has not been done so far, even though it is of high relevance against the background of the introduction of Solvency II, which requires a holistic approach to risk management. Results show a significant positive impact of ERM on firm value for the case of European insurers. In particular, we find that insurers with a high quality risk management (RM) system exhibit a Tobin’s Q that on average is about 6.5% higher than for insurers with less high quality RM after controlling for covariates and endogeneity bias.     

Consumer motives for buying regional products: the REGIOSCALE

Marketing Letters - Consumers are increasingly turning towards regional products (RP). The Consumer Ethnocentric Scale (CETSCALE) has been widely used to examine consumer motives for buying...     

Domestic interest rate,foreign direct investment,and corruption

It has been argued that foreign direct investment can exert upward or downward pressure on the domestic interest rate depending on foreign investors’ relative weights on internal and external finance with respect to the domestic economy. Additionally, a country’s level of corruption can influence firms’ ability to obtain external finance. We find that across countries a 1 percent increase in FDI inflows (outflows) is more likely to reduce the domestic interest rate by as much as 0.7 (1) percent. This empirical association between domestic interest rates and FDI flows is non-monotonically contingent on a country’s level of corruption.