Helmut Gründl

Pricing Double-Trigger Reinsurance Contracts: Financial Versus Actuarial Approach

Apparatus for generating a signal having a predetermined frequency relationship with a subcarrier includes a counter for counting cycles of said subcarrier. Count values from the counter are coupled as address values to a memory circuit. The memory circuit is preprogrammed to provide a signal having the desired frequency responsive to successive address values applied by the counter.

Don’t They Care? Or, Are They Just Unaware? Risk Perception and the Demand for Long-Term Care Insurance

The potential need for long-term care (LTC) is one of the greatest financial risks faced not only by the elderly but also by their adult children, who often provide care or financial assistance. We investigate adult childrens role in the demand for LTC insurance. Similar to flood insurance, we find that demand for LTC insurance is low due to low risk perception. The more aware adult children are of the risk, the more likely LTC insurance is to be purchased, either by the children themselves on behalf of their parents or by the parents under the influence of their children.

Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency

Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index kt in the Lee-Carter model, we assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in our stochastic simulation framework are driven by a GDP-linked variant of the Lee-Carter mortality model. Furthermore, interest rates and stock prices react to changes in GDP, which itself is modeled as a stochastic process. Our results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in GDP is incorporated.

Zur Vorteilhaftigkeit von Kapitallebensversicherungen gegenüber alternativen Anlageformen - Eine Analyse aus Anlegersicht

SummaryIn Germany the most important life insurance product is the endowment policy. The insurance buyer makes regular (annual or monthly) premium payments and receives a payment when he dies, cancels within the contract period, or survives the contract. Contracts typically cover a time period between twelve to forty years. Using the perspective of an investor, i.e., a buyer of the life insurance contract, our study compares the cash flows of German endowment insurance policies with those of investment portfolios with similar pay-off structures. Our empirical analysis is based on data from 12 year contract periods between the years 1956 through 1999 for 51 year old males. Instead of basing the comparison of the life insurance and the alternative portfolio on a single performance figure, for example, yield-to-maturity or terminal value, we look directly at the cash flows. Our analysis shows that life insurance contracts provided higher payments than the alternative portfolios if the actual contract length was at least seven or eight years and if tax effects were taken into account. The study also shows that life insurance contracts underperform the alternative portfolios considerably if they are cancelled during their early years. Therefore, an ultimate evaluation has to be based on the characteristics of the individual who considers such an investment.

Who Benefits from Building Insurance Groups? A Welfare Analysis Based on Optimal Group Risk Management

This paper compares the shareholder-value-maximizing capital structure and pricing policy of insurance groups against that of stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The tradeoff between risk diversification on the one hand and higher dead-weight costs on the other can result in group building being beneficial for shareholders but detrimental for policyholders.

An Incentive-Compatible Experiment on Probabilistic Insurance and Implications for an Insurer's Solvency Level

This paper is the first to conduct an incentive-compatible experiment using real monetary payoffs to test the hypothesis of probabilistic insurance which states that willingness to pay for insurance decreases sharply in the presence of even small default probabilities as compared to a risk-free insurance contract. In our experiment, 181 participants state their willingness to pay for insurance contracts with different levels of default risk. We find that the willingness to pay sharply decreases with increasing default risk. Our results hence strongly support the hypothesis of probabilistic insurance. Furthermore, we study the impact of customer reaction to default risk on an insurer’s optimal solvency level using our experimentally obtained data on insurance demand. We show that an insurer should choose to be default-free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level.

How Persistent Are Equity Shock Spillovers

Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, in this article we show that the distress of a systemically important institution may impact a market also after several days. This time-lagged dependence motivates our measure of systemic risk, the Conditional Shortfall Probability (CoSP), which is related to other common systemic risk measures, but is substantially more reliable. While other systemic risk measures are largely driven by systematic risk, we strengthen the directionality of systemic risk by considering an institution as systemically risk only if its distress has a significant as well as persistent negative effect on the market. Our empirical results suggest, that the financial market is exposed to the systemic risk of systemically important banks on an average of 28 days, while systemically important brokers have a significantly longer and systemically important insurers a significantly shorter impact. Moreover, we show that brokers trigger the largest systemic risk but are exposed to the smallest, while insurers and the American real industry are exposed to the largest systemic risk.

Rising interest rates, lapse risk, and the stability of life insurers

This paper investigates the effects of a rise in interest rate and lapse risk of endowment life insurance policies on the liquidity and solvency of life insurers. We model the book and market value balance sheet of an average German life insurer, subject to both GAAP and Solvency II regulation, featuring an existing back book of policies and an existing asset allocation calibrated by historical data. The balance sheet is then projected forward under stochastic financial markets. Lapse rates are modeled stochastically and depend on the granted guaranteed rate of return and prevailing level of interest rates. Our results suggest that in the case of a sharp increase in interest rates, policyholders sharply increase lapses and the solvency position of the insurer deteriorates in the short-run. This result is particularly driven by the interaction between a reduction in the market value of assets, large guarantees for existing policies, and a very slow adjustment of asset returns to interest rates. A sharp or gradual rise in interest rates is associated with substantial and persistent liquidity needs, that are particularly driven by lapse rates.

Transparency through Financial Claims with 'Fingerprints': A Mechanism for Preventing Financial Crises

Lack of transparency in securitization transactions contributed significantly to the current global financial crisis. This article proposes an incentive-compatible mechanism for future securitization transactions that would increase transparency: financial claims with “fingerprints.” This mechanism would allow market participants at each stage of the securitization process to easily obtain full information about the underlying original risks and the superior claims that need to be satisfied before receiving their own payoffs. The mechanism would considerably enhance transparency in securitization transactions at the expense of some transaction costs. In 2007, the U.S. housing market bubble burst, triggering a financial crisis that resulted in a worldwide recession. Often mentioned as contributors to the crisis are the securitization of mortgages and the repackaging, or tranching, of mortgage-backed securities (MBSs) into collateralized debt obligations (CDOs). MBSs and especially CDOs exhibit a large degree of opaqueness (i.e., market participants often have limited information about the true nature of the risks of the underlying mortgages). Every additional repackaging has the potential for even more information loss. In the run-up to the crisis, this situation caused the market for these securities to dry up. Furthermore, banks that held these opaque securities faced major refinancing problems. The apparent collapse of the market for MBSs has led many policymakers and commentators to demand stricter regulation of transactions and compulsory trading of asset-backed securities at stock exchanges. Some have even called for a complete ban on MBSs. We propose an incentive-compatible mechanism that takes “fingerprints” of the original mortgages and of MBS and CDO transactions. By fingerprints, we mean a complete record of information concerning the original mortgage transactions and all subsequent securitizations of those mortgages. This mechanism would solve many of the markets’ problems without stricter regulation and without impeding the potential for innovation in the securitization markets. We believe that our proposed mechanism would offer advantages at all stages of the securitization process, albeit with some possibly minor transaction costs. Our mechanism is related to recent proposals by several researchers, including suggestions to create a global risk map and a global credit register, to increase and standardize information on mortgages, and to set up a clearinghouse to support the regulatory authorities. Some proposals address systemic risks stemming from interbank relationships, counterparty risk, and the opaqueness of financial institutions. Our proposal, however, is targeted at the specific, but important, market segment of mortgage-backed securities that has experienced market failure. Our proposal is extensive, covering transparency for MBS and CDO payment structures. Moreover, our proposal does not entail stricter regulation of MBSs and CDOs; instead, it creates incentives for market participants to enhance transparency and thus keep alive the free market and its innovative forces. Despite our nonregulatory approach, our mechanism could be an integral part of a global risk map. Our proposal is based on an idea put forward by Harry Markowitz, who suggested setting up, as part of efforts to address the immediate problems of the financial crisis, a regulatory body that would conduct an in-depth census of institutions that own securitized assets. The information collected would encompass detailed data on security claim structures and underlying mortgage risks. Markowitz also suggested that the information be used to solve some of the more severe problems of the current crisis—no confidence in financial institutions that hold securitized assets and no trade in “toxic assets.” Under our proposal, a systematic collection of securitization transaction data could become the cornerstone of an incentive-compatible mechanism in securitization transactions and thus foster a revival of securitization markets without new regulations.

Cheap Talk and Decision Making in Financial Institutions: Implications for the Risk Management Organization

This paper investigates the question of how risk management should be embedded in a financial firms hierarchy. We take an innovative approach to answering this question by combining capital market theory with game-theoretic thinking. We develop a theory for the integration of risk management -- the provider of risk information -- into an organization based on private information and differences in preferences. A simple model compares the payoffs from uninformed decision making, solo decision making, independent decision making, and coordinated decision making when information about a projects expected return and risk is dispersed in the organization. Our findings have a number of implications for the organization of risk management.