The Relations among Organizational and Distribution Forms and Capital and Asset Risk Structures in the Life Insurance Industry

This article is the first step toward integrating in a single framework two previously separate lines of research on major structural decisions of life insurers. The literature has previously studied the relation between capital structure and asset risk on the one hand, and the relation between organizational form and distribution system on the other hand, without integrating them. Using life insurer data for 1993–1999, we model the four key insurer decisions of capital structure, asset risk, organizational form, and distribution system as endogenous choices in a single interrelated set of simultaneous equations. The model assesses the nature of the interactions among these decisions. The model also assesses the impact of insurers' fundamental business strategy (treated as predetermined) on these choices. The business‐strategy hypothesis views other key decisions as jointly determined and driven by the fundamental business strategy, once the latter is set in motion. Confirming previous studies, we find a positive relation between capital ratios and asset risk. We also find an association in the simultaneous context between stock ownership and brokerage distribution, which was not found in prior studies. Stock ownership is related to greater financial and asset risk taking, whereas brokerage distribution is associated with lower risk taking. These and other results are interpreted in light of several theories, including transaction‐cost economics (TCE), agency theory, and regulatory and bankruptcy cost avoidance. Deriving from these theories, the finite risk paradigm emerges as the most comprehensive interpretation of the results, as opposed to the risk‐subsidy hypothesis of the impact of guarantee funds. We also find support for the notion that the business strategy drives the capital and distribution decisions, as predicted by TCE.     

Effects of Health and Longevity on Financial Risk Tolerance

We investigate the effects of health and life expectancy on tolerance of financial risk. Using a standard life-cycle model, we find that the effects of health and life expectancy on preferences over lifetime-income risk are theoretically ambiguous. However, risk tolerance is independent of health and life expectancy when utility takes one of the standard (harmonic absolute risk aversion) functional forms or when optimal consumption is constant over time. Our empirical results, using data from a stated-preference survey (n=2,795), suggest that financial risk tolerance is positively associated with both health and life expectancy; hence utility is not consistent with standard functional forms.     

Risk dynamics surrounding the issuance of convertible bonds

This paper analyzes the risk dynamics surrounding convertible bond offerings (CBOs) and Seasoned Equity Offerings (SEOs). As convertible bonds are commonly believed to be very effective at mitigating adverse selection or overinvestment problems we would expect differing risk and return patterns for convertible bond and seasoned equity issuers. By analyzing 1148 convertible bond offerings and comparing them to 2905 seasoned equity offerings, we show however that for both issuer types the systematic risk increases prior to issuance and drops sharply thereafter. This result is consistent with the notion of exercising real options, as growth options are always riskier than the underlying assets and exercising them at issuance causes an immediate drop in risk. The real option framework and the proposed dynamics of systematic risk also provide a rational explanation for the negative announcement effect, as well as any long-term underperformance subsequent to the CBO and the SEOs.     

企业现金流风险识别研究

现金流是企业财务状况的综合表现,对现金流风险的识别研究是企业实施财务风险管理的关键.本文认为,对现金流风险识别应把握三方面工作:首先,要对现金流量表结构进行研究,通过现金流来源的不同构成形式,以及企业所处的生命周期阶段分析,探究企业现金流的综合风险状况.其次,要在现金流结构分析的基础上,理性构建风险评价指标体系.最后,通过建立主成分分析模型,合理界定风险临界区域,进一步分析现金流风险程度,使企业充分认识风险,加强现金流风险管理.     

Risk measures with the CxLS property

In the present contribution, we characterise law determined convex risk measures that have convex level sets at the level of distributions. By relaxing the assumptions in Weber (Math. Finance 16:419–441, 2006), we show that these risk measures can be identified with a class of generalised shortfall risk measures. As a direct consequence, we are able to extend the results in Ziegel (Math. Finance, 2014, http://onlinelibrary.wiley.com/doi/10.1111/mafi.12080/abstract) and Bellini and Bignozzi (Quant. Finance 15:725–733, 2014) on convex elicitable risk measures and confirm that expectiles are the only elicitable coherent risk measures. Further, we provide a simple characterisation of robustness for convex risk measures in terms of a weak notion of mixture continuity.     

Risk shifting and regulatory arbitrage: Evidence from operational risk

We document a robust negative relation between operational risk exposure and bank capital levels for a sample of large U.S. banks under the Basel I Capital Accords. The results are consistent with the notion that capital-constrained banks increased operational risk exposure at the time when Basel I regulations did not require an explicit capital charge for operational risk. More broadly, our results show new channel by which financial regulations incentivize banks to shift their risk taking to less regulated risk areas. We focus on the case of operational risk because it went from a largely unregulated risk type to a major risk that accounts for about 25% of large U.S. banks’ risk-weighted assets.     

The Risk Balls Game: Transforming Risk and Insurance Into Tangible Concepts

The Risk Balls game is used as a game in an introductory insurance course to demonstrate in a tangible way the notion of risk and its relationship to insurance. Through playing with the ``risk balls,' each one representing a different type of risk, the students experience feelings of anxiety about risk, and later, the sense of anxiety reduction when they transfer the risk balls to insurers. The game incorporates complex concepts of risk transfer and risk reduction via pooling and sharing of risk. The mathematical implications of the law of large numbers are physically felt in the classroom when the students experience the relief associated with transferring the risk balls to insurers. The discussion that ensues during the game includes aspects of the underwriting process; moral hazard; adverse selection; the role of agents, insurers, and regulators; and the nature of the insurance contract. The game of risk balls stimulates lively group discussions and provides hands-on experience with risks such as premature death risk or fire risk and the fears associated with them.     

To Hedge or Not to Hedge: Managing Demographic Risk in Life Insurance Companies

Demographic risk, i.e., the risk that life tables change in a nondeterministic way, is a serious threat to the financial stability of an insurance company having underwritten life insurance and annuity business. The inverse influence of changes in mortality laws on the market value of life insurance and annuity liabilities creates natural hedging opportunities. Within a realistically calibrated shareholder value (SHV) maximization framework, we analyze the implications of demographic risk on the optimal risk management mix (equity capital, asset allocation, and product policy) for a limited liability insurance company operating in a market with insolvency‐averse insurance buyers. Our results show that the utilization of natural hedging is optimal only if equity is scarce. Otherwise, hedging can even destroy SHV. A sensitivity analysis shows that a misspecification of demographic risk has severe consequences for both the insurer and the insured. This result highlights the importance of further research in the field of demographic risk.     

Risk and the cosmopolitanization of solidarities

Abstract

For classical sociologists, national solidarity was a response to the risks and uncertainties of modernity. National solidarity was said to provide the foundations for social order and justice (Durkheim), serve as the basis for political legitimacy (Weber), and address issues of (in)equality (Marx). Throughout the twentieth century, national solidarity seemed to perform these functions adequately, if often at the expense of those not belonging to the national community. However, with the demise of progress as a cultural prophylaxis to contain the future, it is often said that newly emergent world risks spell the end of solidarity. On this view, risk, individualization, and the cosmopolitanization of life worlds are contributing to the fragmentation of societies and pushing solidarity toward expiration. Yet, this jeremiad is based on an anachronistic notion of solidarity, which does not account for the recent adaptations of nationhood. In contrast, I argue that new global risks are not detrimental to the notion of solidarity but rather serve as a precondition for the emergence of cosmopolitanized solidarities. Global culture and political norms from human rights to environmentalism have catalyzed a reimagining of nationhood itself. In order to grasp new forms of solidarity which buttress this reimagined nationhood, I draw on Ulrich Beck’s distinction between three historically specific iterations of the concept of risk, as something that: can be calculated; is malign and incalculable; has the potential to generate goods.     

Performing risk and the project: Risk maps as mediating instruments

In this paper, we analyze the relationship between management control and risk management by investigating the use of risk maps in an inter-organizational project collaboration in the Norwegian petroleum industry. The various ways in which risk maps are drawn upon in the course of the project reveal sources of perceived ‘usefulness’ that are not primarily to do with increased attention toward early warning signals and the defensive production of audit trails, as suggested by previous research. Rather, the study shows how risk maps act as mediating instruments which allow distributed actors to adjudicate interests, build confidence in and associate with ‘the project’ and its progress over time. Drawing on social studies of science and technology, the study shows how the graphical representations of risk maps manage to engage the user and act as mediating platforms where ‘performances’ around the notion of risk can happen. The paper thus extends and complements existing explanations of the pervasiveness of enterprise risk management technology and discusses its interrelation with project management and inter-organizational controls. More broadly, the paper illustrates how the government of risk is related to mediating instruments and how such mediation happens in the interplay between text and conversation.     

Biometric Solvency Risk for Portfolios of General Life Contracts. I. The Single-Life Multiple Decrement Case

Abstract

Solvency II splits life insurance risk into seven risk classes consisting of three biometric risks (mortality risk, longevity risk, and disability/morbidity risk) and four nonbiometric risks (lapse risk, expense risk, revision risk, and catastrophe risk). The best estimate liabilities for the biometric risks are valued with biometric life tables (mortality and disability tables), while those of the nonbiometric risks require alternative valuation methods. The present study is restricted to biometric risks encountered in traditional single-life insurance contracts with multiple causes of decrement. Based on the results of quantitative impact studies, process risk was deemed to be not significant enough to warrant an explicit calculation. It was therefore assumed to be implicitly included in the systematic/parameter risk, resulting in a less complex standard formula. For the purpose of internal models and improved risk management, it appears important to capture separately or simultaneously all risk components of biometric risks. Besides its being of interest for its own sake, this leads to a better understanding of the standard approach and its application extent. Based on a total balance sheet approach we express the liability risk solvency capital of an insurance portfolio as value-at-risk and conditional value-at-risk of the prospective liability risk understood as random present value of future cash flows at a given time. The proposed approach is then applied to determine the biometric solvency capital for a portfolio of general life contracts. Using the conditional mean and variance of a portfolio’s prospective liability risk and a gamma distribution approximation we obtain simple solvency capital formulas as well as corresponding solvency capital ratios. To account for the possibility of systematic/parameter risk, we propose either to shift the biometric life tables or to apply a stochastic biometric model, which allows for random biometric rates. A numerical illustration for a cohort of immediate life annuities in arrears reveals the importance of process risk in the assessment of longevity risk solvency capital.     

Risk, knowledge and contradiction: An alternative and transdiciplinary view as to how risk is induced

The following paper attempts to elucidate the relationship between risk and knowledge across a specific form of contradiction by (1) examining the notion and definition(s) of contradiction; (2) examining a specific type of contradiction (as ‘ambiguity’) which can act as either a cause or mitigator of risk; and (3) examining the nature of both knowledge and risk. The resultant proposed framework provides an alternative perspective on risk, whereby it is argued that risk is induced across repressed ambiguities; with the latter also resulting in truncated or limited knowledge. Conversely, risk is mitigated across the full expression of these same ambiguities, which in turn leads to enriched or complexified knowledge.This perspective argues that as long as we fail to recognise and embrace the myriad of dyadic pairs or ambiguities which both surround us and are inherent within us as human beings, we strongly increase the likelihood of both validating and reinforcing Beck's [U. Beck, La société du risque: Sur la voie d’une autre modernité, Alto Aubier, Paris, 2001] thesis of a future society where risk predominates.     

寿险资金运用的风险限额管理

资金运用风险是寿险公司面临的两大最主要风险之一,加强资金运用风险管理对确保寿险公司持续稳健经营至关重要。风险限额管理作为风险管理的核心内容,是风险管理体系中不可或缺的组成部分。建立一个科学、可操作和有效的风险限额管理体系,为寿险资金运用风险管理提供控制标准,是决定风险管理成效的关键环节。本文借鉴风险限额分配模型,总结寿...     

Mitigating Interest Rate Risk in Variable Annuities: An Analysis of Hedging Effectiveness under Model Risk

Variable annuities are investment vehicles offered by insurance companies that combine a life insurance policy with long-term financial guarantees. These guarantees expose the insurer to market risks, such as volatility and interest rate risks, which can be managed only with a hedging strategy. The objective of this article is to study the effectiveness of dynamic delta-rho hedging strategies for mitigating interest rate risk in variable annuities with either a guaranteed minimum death benefit or guaranteed minimum withdrawal benefit rider. Our analysis centers on three important practical issues: (1) the robustness of delta-rho hedging strategies to model uncertainty, (2) the impact of guarantee features (maturity versus withdrawal benefits) on the performance of the hedging strategy, and (3) the importance of hedging interest rate risk in either a low and stable or rising interest rate environment. Overall, we find that the impact of interest rate risk is equally felt for the two types of products considered, and that interest rate hedges do lead to a significant risk reduction for the insurer, even when the ongoing low interest rate environment is factored in.     

两因子随机死亡率状态空间模型及长寿风险测度

引入状态空间模型对传统两因子CBD模型拟合阶段和预测阶段进行联合建模,并基于卡尔曼滤波方法对模型参数进行估计。进一步考虑到死亡率数据的小样本特征,结合Bootstrap仿真技术和生存年金组合折现模型对长寿风险进行测度。利用1996~2011年数据展开实证研究,结果表明:结合模型解释能力、参数估计结果和误差项正态分布检验结果,两因子状态空间模型要优于传统CBD模型;年金组合规模的扩大可以消除微观长寿风险,但不能消除宏观长寿风险和参数风险;宏观长寿风险占据着不可分散风险的主导地位。     

A Cautionary Note on Natural Hedging of Longevity Risk

In this article, we examine the so-called natural hedging approach for life insurers to internally manage their longevity risk exposure by adjusting their insurance portfolio. In particular, unlike the existing literature, we also consider a nonparametric mortality forecasting model that avoids the assumption that all mortality rates are driven by the same factor(s).

Our primary finding is that higher order variations in mortality rates may considerably affect the performance of natural hedging. More precisely, although results based on a parametric single factor model—in line with the existing literature—imply that almost all longevity risk can be hedged, results are far less encouraging for the nonparametric mortality model. Our finding is supported by robustness tests based on alternative mortality models.     

“偿二代”监管体系下寿险公司风险管理研究

随着经济发展进入新常态,已有的监管体系"偿一代"已无法适应当前以及未来寿险业风险管理的要求.2016年,以全面风险管理为导向的"偿二代"正式实施,给我国寿险公司的风险管理带来了深刻影响.为此,本文从负债端、资产端和公司风险管理三个方面分析"偿二代"对寿险公司风险管理的作用路径及影响.研究发现:在"偿二代"下寿险公司在负债端的风险管理重点应在于着力优化并调整产品结构,使得长期期缴业务成为核心;在资产端的风险管理重点应在于提升权益投资和另类投资比例;在公司的风险管理上应逐步加强完善风险管理框架,不断提高全面风险管理能力.     

Optimal Risk Classification with an Application to Substandard Annuities

Abstract

Substandard annuities pay higher pensions to individuals with impaired health and thus require special underwriting of applicants. Although such risk classification can substantially increase a company's profitability, these products are uncommon except for the well-established U.K. market. In this paper we comprehensively analyze this issue and make several contributions to the literature. First, we describe enhanced, impaired life, and care annuities, and then we discuss the underwriting process and underwriting risk related thereto. Second, we propose a theoretical model to determine the optimal profit-maximizing risk classification system for substandard annuities. Based on the model framework and for given price-demand dependencies, we formally show the effect of classification costs and costs of underwriting risk on profitability for insurers. Risk classes are distinguished by the average mortality of contained insureds, whereby mortality heterogeneity is included by means of a frailty model. Third, we discuss key aspects regarding a practical implementation of our model as well as possible market entry barriers for substandard annuity providers.     

Risk-aversion concepts in expected- and non-expected-utility models

The non-expected-utility theories of decision under risk have favored the appearance of new notions of increasing risk like monotone increasing risk (based on the notion of comonotonic random variables) or new notions of risk aversion like aversion to monotone increasing risk, in better agreement with these new theories. After a survey of all the possible notions of increasing risk and of risk aversion and their intrinsic definitions, we show that contrary to expected-utility theory where all the notions of risk aversion have the same characterization (u concave), in the framework of rank-dependent expected utility (one of the most well known of the non-expectedutility models), the characterizations of all these notions of risk aversion are different. Moreover, we show that, even in the expected-utility framework, the new notion of monotone increasing risk can give better answers to some problems of comparative statics such as in portfolio choice or in partial insurance. This new notion also can suggest more intuitive approaches to inequalities measurement.     

‘Real without being concrete’: the ontology of public concern and its significance for the Social Amplification of Risk Framework (SARF)

Abstract

Public concern is a pivotal notion in the risk perception, communication and management literature. It is, for example, a central concept with regard to the social amplification of risk, and as a justification for policy attention. Despite its ubiquity, the notion of public concern remains a ‘black box’ presenting a poorly understood state of affairs as a reified matter-of-fact. Paying attention to the deployment and metrics of public concern, and the work it is required to do, will enhance the power of approaches to understanding risk, and policymaking. Thus, the broad purpose of this paper is to unpack the notion of public concern by adopting an ontological yet critical perspective, drawing on a range of literature that considers ontology. We reflect on how publics and public concern have been conceptualised with regard to the dichotomies of individual/social and private/public, given that they imply different levels and dimensions of concern. We draw on empirical work that illuminates the assessment and measurement of public concern and how the public have responded to risk events. Considering public concern through an ontological lens affords a means of drawing renewed critical attention to objects that might otherwise appear finished or ready-made.