In financial conglomerates and insurance groups, enterprise risk management is becoming increasingly important in controlling and managing the different independent legal entities in the group. The aim of this paper is to assess and relate risk concentration and joint default probabilities of the group's legal entities in order to achieve a more comprehensive picture of an insurance group's risk situation. We further examine the impact of the type of dependence structure on results by comparing linear and nonlinear dependencies using different copula concepts under certain distributional assumptions. Our results show that even if financial groups with different dependence structures do have the same risk concentration factor, joint default probabilities of different sets of subsidiaries can vary tremendously.
The aim of this paper is to analyze the effect of capital and risk transfer instruments (CRTIs) on a financial group's risk situation. In this respect, we extend previous literature by accounting for the conglomerate discount on firm value, which is a reduction in shareholder value due to diversification within the group. In general, CRTIs between parent and subsidiaries have a substantial effect on the diversification of risks, economic capital requirements, and default risk, which we study in detail for different types of CRTIs, including intra-group retrocession and guarantees. One main finding is that diversification effects within the group are much lower when taking into account conglomerate discount effects. We believe this aspect to be an important issue in the ongoing discussion on group solvency regulation and enterprise risk management.
The aim of this paper is to compare pricing and performance of mutual funds with two types of guarantees: a lookback guarantee and an interest rate guarantee. In a simulation analysis of different portfolios based on stock, bond, real estate, and money market indices, we first calibrate guarantee costs to be the same for both investment guarantee funds. Second, their performance is contrasted, measured with the Sharpe ratio, Omega, and Sortino ratio, and a test with respect to first, second, and third order stochastic dominance is provided. We further investigate the impact of the underlying funds strategy, first looking at a conventional fund having a constant average rate of return and standard deviation over the contract term, and then at a Constant Proportion Portfolio Insurance managed fund. This analysis is intended to provide insights for investors with different risk-return preferences regarding the interaction of guarantee costs and the performance of different mutual funds with embedded investment guarantees
In general, conglomeration leads to a diversification of risks (the diversification benefit)and to a decrease in shareholder value (the conglomerate discount). Diversification benefitsin financial conglomerates are typically derived without accounting for reducedshareholder value. However, a comprehensive analysis requires competitive conditionswithin the conglomerate, i.e., shareholders and debtholders should receive risk-adequatereturns on their investment. In this paper, we extend the literature by comparing the diversificationeffect in conglomerates with and without accounting for the altered shareholdervalue. We derive results for a holding company, a parent-subsidiary structure, andan integrated model. In addition, we consider different types of capital and risk transferinstruments in the parent-subsidiary model, including intra-group retrocession and guarantees.We conclude that under competitive conditions, diversification does not matter tothe extent frequently emphasized in the literature. The analysis aims to contribute to theongoing discussion on group solvency regulation and enterprise risk management
Purpose
– Definitions of pooling effects in insurance companies may convey the impression that the achieved risk reduction effect will be beneficial for policyholders, since typically lower premiums are paid for the same safety level with an increasing number of insureds, or a higher safety level is achieved for a given premium level for all pool members. However, this view is misleading and the purpose of this paper is to reexamine this apparent merit of pooling from the policyholder's perspective.
Design/methodology/approach
– This is achieved by comparing several valuation approaches for the policyholders' claims using different assumptions of the individual policyholder's ability to replicate the contract's cash flows and claims.
Findings
– The paper shows that the two considered definitions of risk pooling do not offer insight into the question of whether pooling is actually beneficial for policyholders.
Originality/value
– The paper contributes to the literature by extending and combining previous work, focusing on the merits of pooling claims (using the two definitions above) from the policyholder's perspective using different valuation approaches.
A change in the corporate tax level can have a significant impact on rate making and capital structure for insurance companies. The purpose of this paper is to study this effect on competitive equity-premium combinations for different asset and liability models while retaining a fixed safety level. This is a crucial consideration as a change in the tax rate leads, in general, to a different risk of insolvency. Hence, fixing the safety level serves to isolate the effect of taxes without shifting the insurer's risk situation whenever taxes are varied. The model framework includes stochastic assets as well as stochastic claims costs. We further compare the results for liability models with and without a jump component. Insurance rate making is conducted using option pricing theory.
