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Displaying results 1 to 6 of 6.

  1. Life insurance convexity
    Author: Grochola, Nicolaus; Gründl, Helmut; Kubitza, Christian
    Published: [2023]
    Publisher:  European Central Bank, Frankfurt am Main, Germany

    Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise... more

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    ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
    Signature:
    DS 534
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    Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per year. We show that these fire sales are fueled by surrender value guarantees and insurers' long-term investments.

     
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    Source: Union catalogues
    Language: English
    Media type: Ebook
    Format: Online
    ISBN: 9789289961141
    Other identifier:
    hdl: 10419/278661
    Series: Working paper series / European Central Bank ; no 2829
    Subjects: Life Insurance; Liquidity Risk; Interest Rates; Surrender Options; Systemic Risk
    Scope: 1 Online-Ressource (circa 71 Seiten), Illustrationen
  2. Life insurance convexity
    Author: Kubitza, Christian; Grochola, Nicolaus; Gründl, Helmut
    Published: March 2022
    Publisher:  ECONtribute, Bonn

    Life insurers sell savings contracts with surrender options, allowing policyholders to prematurely withdraw guaranteed surrender values. Surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender... more

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    Life insurers sell savings contracts with surrender options, allowing policyholders to prematurely withdraw guaranteed surrender values. Surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document for the German life insurance sector. Using a calibrated model, we estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per annum. The resulting price impact depends on insurers' investment behavior. Forced asset sales are amplified by insurers' long-term investments but mitigated by reducing the guarantees on surrender values.

     
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    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/262098
    Edition: This version: March 22, 2022
    Series: ECONtribute discussion paper ; no. 154
    Subjects: Life Insurance; Liquidity Risk; Interest Rates; Fire Sales; Systemic Risk
    Scope: 1 Online-Ressource (circa 78 Seiten), Illustrationen
  3. Exploring the market risk profiles of U.S. and European life insurers
    Author: Grochola, Nicolaus; Browne, Mark Joseph; Gründl, Helmut; Schlütter, Sebastian
    Published: [2021]
    Publisher:  International Center for Insurance Regulation, Goethe University Frankfurt, Frankfurt am Main

    Market risks account for an integral part of life insurers' risk profiles. This paper explores the market risk sensitivities of insurers in two large life insurance markets, namely the U.S. and Europe. Based on panel regression models and daily... more

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    Market risks account for an integral part of life insurers' risk profiles. This paper explores the market risk sensitivities of insurers in two large life insurance markets, namely the U.S. and Europe. Based on panel regression models and daily market data from 2012 to 2018, we analyze the reaction of insurers' stock returns to changes in interest rates and CDS spreads of sovereign counterparties. We find that the influence of interest rate movements on stock returns is more than 50% larger for U.S. than for European life insurers. Falling interest rates reduce stock returns in particular for less solvent firms, insurers with a high share of life insurance reserves and unit-linked insurers. Moreover, life insurers' sensitivity to interest rate changes is seven times larger than their sensitivity towards CDS spreads. Only European insurers significantly su↵er from rising CDS spreads, whereas U.S. insurers are immunized against increasing sovereign default probabilities.

     
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    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/242963
    Series: ICIR working paper series ; no. 39 (2021)
    Subjects: Life insurance; interest rate risk; credit risk
    Scope: 1 Online-Ressource (circa 48 Seiten)
  4. Life insurance convexity
    Author: Kubitza, Christian; Grochola, Nicolaus; Gründl, Helmut
    Published: [2021]
    Publisher:  International Center for Insurance Regulation, Goethe University Frankfurt, [Frankfurt am Main]

    Life insurers massively sell savings contracts with surrender options which allow policyholders to withdraw a guaranteed amount before maturity. These options move toward the money when interest rates rise. Using data on German life insurers, we... more

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    Verlag (kostenfrei)
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    Location:
    ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
    Signature:
    DS 379
    Inter-library loan:
    No inter-library loan

     

    Life insurers massively sell savings contracts with surrender options which allow policyholders to withdraw a guaranteed amount before maturity. These options move toward the money when interest rates rise. Using data on German life insurers, we estimate that a 1 percentage point increase in interest rates raises surrender rates by 17 basis points. We quantify the resulting liquidity risk in a calibrated model of surrender decisions and insurance cash flows. Simulations predict that surrender options can force insurers to sell up to 3% of their assets, depressing asset prices by 90 basis points. The e↵ect is amplified by the duration of insurers' investments, and its impact on the term structure of interest rates depends on life insurers' investment strategy.

     
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    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/247672
    Series: ICIR working paper series ; no. 42 (2021)
    Subjects: Life Insurance; Liquidity Risk; Interest Rates; Fire Sales; Systemic Risk
    Scope: 1 Online-Ressource (circa 51 Seiten), Illustrationen
  5. Discretionary decisions in capital requirements under Solvency II
    Author: Grochola, Nicolaus; Schlütter, Sebastian
    Published: [2023]
    Publisher:  [International Center for Insurance Regulation, Goethe Universität Frankfurt am Main], [Frankfurt am Main]

    The capital requirements of Solvency II allow insurers to make discretionary choices. Besides extensive possibilities regarding the choice of a risk model (ranging between a regulatory prescribed standard formula to a full self-developed internal... more

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    The capital requirements of Solvency II allow insurers to make discretionary choices. Besides extensive possibilities regarding the choice of a risk model (ranging between a regulatory prescribed standard formula to a full self-developed internal model), insurers can make use of transitional measures and adjustments, which can have a substantial impact on their reported solvency level. The aim of this article is to study the effect of these long-term guarantee measures and to identify drivers of the discretionary decisions. For this purpose, we first assess the risk profile of 49 European insurers by estimating the sensitivities of their stock returns to movements in market risk drivers, such as interest rates and credit spreads. In a second step, we analyze to what extent insurers' risk profiles influence their discretionary decisions in the capital requirement calculation. We gather information on discretionary decisions based on hand-collected Solvency II data for the years 2016 to 2020. We find that insurers optimize their reported solvency situation by making discretionary decisions in such a way that capital requirements for material risk drivers are clearly reduced. For instance, we find that the usage of the volatility adjustment is positively related to the interest rate risk as perceived by financial markets, even when controlling for the portion of life insurance in technical provisions. Similarly, the matching adjustment is linked to significantly higher credit risk sensitivities. Our results point out that due to discretionary decisions Solvency II figures can substantially deviate from a market-oriented, risk-based view on insurance companies' risk situation.

     
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    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/272276
    Edition: This version: June 2023
    Series: [Working paper series] / [International Center for Insurance Regulation, Goethe Universität Frankfurt am Main] ; [no. 50]
    Subjects: Solvency II; capital requirements; discretionary decisions
    Scope: 1 Online-Ressource (circa 39 Seiten), Illustrationen
  6. The influence of negative interest rates on life insurance companies
    Author: Grochola, Nicolaus
    Published: [2023]
    Publisher:  [International Center for Insurance Regulation, Goethe University Frankfurt], [Frankfurt am Main]

    Between 2016 and 2022, life insurers in several European countries experienced negative longterm interest rates, which put pressure on their business models. The aim of this paper is to empirically investigate the impact of negative interest rates on... more

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    Between 2016 and 2022, life insurers in several European countries experienced negative longterm interest rates, which put pressure on their business models. The aim of this paper is to empirically investigate the impact of negative interest rates on the stock performance of life insurers. To measure the sensitivities, I estimate the level, slope, and curvature of the yield curve using the Nelson-Siegel model and empirical proxies. Panel regressions show that the effect of changes in the level is up to three times greater in a negative interest rate environment than in a positive one. Thus, a 1ppt decline in long-term interest rates reduces the stock returns of European life insurers by up to 10ppt when interest rates are below 0%. I also show that the relationship between the level and the sensitivity to interest rates is convex, and that life insurers benefit from rising interest rates across all maturity types.

     
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    Source: Union catalogues
    Language: English
    Media type: Book
    Format: Online
    Other identifier:
    hdl: 10419/279897
    Edition: This version: November 2023
    Series: [Working paper series] / [International Center for Insurance Regulation, Goethe Universität Frankfurt am Main] ; [no. 53]
    Subjects: Life insurance; interest rate risk; negative interest rates
    Scope: 1 Online-Ressource (circa 42 Seiten), Illustrationen