Jennifer L. Wang

An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach

This article investigates the natural hedging strategy to deal with longevity risks for life insurance companies. We propose an immunization model that incorporates a stochastic mortality dynamic to calculate the optimal life insurance–annuity product mix ratio to hedge against longevity risks. We model the dynamic of the changes in future mortality using the well-known Lee–Carter model and discuss the model risk issue by comparing the results between the Lee–Carter and Cairns–Blake–Dowd models. On the basis of the mortality experience and insurance products in the United States, we demonstrate that the proposed model can lead to an optimal product mix and effectively reduce longevity risks for life insurance companies.

Corporate Governance and Efficiency: Evidence from U.S. Property–Liability Insurance Industry

This study examines the relation between corporate governance and the efficiency of the U.S. property–liability insurance industry during the period from 2000 to 2007. We find a significant relation between efficiency and corporate governance (board size, proportion of independent directors on the audit committee, proportion of financial experts on the audit committee, director tenure, proportion of block shareholding, average number of directorships, proportion of insiders on the board, and auditor dependence). We also find property–liability insurers have complied with the Sarbanes‐Oxley Act (SOX) to a large extent. Although SOX achieved the goal of greater auditor independence and might have prevented Enron‐like scandals, it had some unexpected effects. For example, insurers became less efficient when they had more independent auditors because the insurers were unable to recoup the benefits of auditor independence.

Hedging Longevity Risk When Interest Rates are Uncertain

Abstract This paper proposes an asset liability management strategy to hedge the aggregate risk of annuity providers under the assumption that both the interest rate and mortality rate are stochastic. We assume that annuity providers can invest in longevity bonds, long-term coupon bonds, and shortterm zero-coupon bonds to immunize themselves from the risks of the annuity for the equity holders subject to a required profit. We demonstrate that the optimal allocation strategy can lead to the lowest risk under different yield curves and mortality rate assumptions. The longevity bond can also be regarded as an effective hedging vehicle that significantly reduces the aggregate risk of the annuity providers.

A Reexamination of the Relationship between Organizational Forms and Distribution Channels in the U.S. Property Liability Insurance Industry

How do property liability insurance companies choose their organizational forms and distribution channels? Prior studies have not yet provided a consistent conclusion. In this paper, we propose a reduced form approach to reexamine the relationship between organizational forms and distribution channels in the insurance industry, using cross-sectional data pertaining to U.S. property liability insurance companies in 2004. We adopt a conditional dependence test, which can overcome the sensitivity problem of the structural form setting. The results show that after we control for all explanatory variables, the relationship between organizational forms and distribution channels is conditionally uncorrelated. The result is consistent with Regan and Tzeng (1999), but contradicts the findings of Baranoff and Sager (2003) and Kim et al. (1996).How do property liability insurance companies choose their organizational forms and distribution channels? Prior studies have not yet provided a consistent conclusion. In this paper, we propose a reduced form approach to reexamine the relationship between organizational forms and distribution channels in the insurance industry, using cross-sectional data pertaining to U.S. property liability insurance companies in 2004. We adopt a conditional dependence test, which can overcome the sensitivity problem of the structural form setting. The results show that after we control for all explanatory variables, the relationship between organizational forms and distribution channels is conditionally uncorrelated. The result is consistent with Regan and Tzeng (1999), but contradicts the findings of Baranoff and Sager (2003) and Kim et al. (1996).

Longevity Risk and Capital Markets: The 2007-2008 Update

Longevity Three: The Third International Longevity Risk and Capital Markets Solutions Conference was held in Taipei, Taiwan on 20-21 July 2007. It was hosted by National Chengchi University. Mortality improvements around the world are putting more pressure on governments, pension funds, life insurance companies as well as individuals to deal with the increasing longevity risk they face. Financial markets, on the other hand, can in principle provide vehicles to hedge longevity risk effectively. Many new investment products have been created both by the insurance/reinsurance industry and by the capital markets. Mortality catastrophe bonds are an example of a successful insurance-linked security. Some new innovative capital market solutions for transferring longevity risk include survivor bonds, reverse mortgages, longevity-linked swaps and forward contracts. The aim of the International Longevity Risk and Capital Markets Solutions Conferences is to bring together academics and practitioners from all over the world to discuss and analyze these exciting new developments. The first conference was held at Cass Business School in London in February 2005. This conference was prompted by the announcement of the Swiss Re mortality catastrophe bond in December 2003 and the EIB/BNP/PartnerRe longevity bond in November 2004. The second conference was held in April 2006 in Chicago and hosted by the Katie School at Illinois State University. In the intervening period, there were further issues of mortality catastrophe bonds, as well as the release of the Credit Suisse Longevity Index. Life settlement securitizations were also beginning to take place in the US. In the UK, new life companies backed by global investment banks and private equity firms were setting up for the express purpose of buying out the defined benefit pension liabilities of UK corporations. Goldman Sachs announced it was setting up such a buy-out company itself because the issue of pension liabilities was beginning to impede its mergers and acquisitions activities. So there was now clear evidence that a new global capital market in longevity risk transference was beginning to emerge. However, as with many other economic activities, not all progress follows a smooth path. The EIB/BNP/PartnerRe longevity bond did not attract sufficient investor interest and was withdrawn in late 2005. But a great deal was learned from this about the conditions and requirements needed to launch a successful capital market.

Pricing and Implementation of Longevity Bonds in Taiwan

As the population ages and the deterioration of pension funds continue, hedging longevity risk is becoming increasingly important in Taiwan. This article analyzes the potential market for issuing longevity bonds to hedge against the longevity risk in Taiwan. Many recent studies have suggested that longevity bond can serve as an effective risk management tool to mitigate the longevity risks. Following the design of the longevity bond proposed by Denuit, Devolder and Godernaiaux (2007), we make an illustration of pricing longevity bond using Lee-Carter model on the basis of the mortality experience in Taiwan. Our results show that the risk premium for issuing a longevity bond in Taiwan is lower than that in the United State. However, in order to measure the longevity risk more precisely and to overcome the potential problems of issuing longevity bonds in Taiwan, the quality of mortality data should be improved and more regulations need to be amended in the near future.

Intertemporal Stable Pension Funding

This paper proposes a discrete dynamic programming model to maintain pension contribution in a stable level. By assuming an intertemporal stable contribution rate, we derive an algorithm to calculate the optimal contribution that requires less exogenous information and produces more stable results. Our simulation results further confirm that our model helps pension fund managers to make more stable contributions and further reduce the contribution risk for the defined benefit pension fund than the traditional algorithms do.