Rosa Cocozza

A financial analysis of surplus dynamics for deferred life schemes

The paper investigates the financial dynamics of the surplus evolution in the case of deferred life schemes, in order to evaluate both the distributable earnings and the expected worst occurence for the portfolio surplus. The evaluation is based on a compact formulation of the insurance surplus defined as the difference between accrued assets and present value of relevant liabilities. The dynamic analysis is performed by means of Monte Carlo simulations in order to provide a year-by-year valuation. The analysis is applied to a deferred life scheme exemplar, considering that the selected contract constitutes the basis for many life insurance policies and pension plans. The evaluation is put into an asset and liability management decision-making context, where the relationships between profits and risks are compared in order to evaluate the main features of the whole portfolio.

An 'Economical' Pricing Model for Hybrid Products

In this chapter, we propose, after a brief review of the convertible bond pricing theory, an innovative numerical procedure that can efficiently be adopted with the aim of pricing convertibles. Such a procedure accounts for two sources of risk: The stock price and the spot interest rate. More precisely, we assume that the stock price dynamics is described by the Cox–Ross–Rubinstein (Cox et al., 1979) binomial model under a stochastic risk-free rate, whose dynamics evolves over time according to the Black–Derman–Toy (Black et al., 1990) one-factor model.

A Liability Adequacy Test for Mathematical Provision

This paper deals with the application of the Value at Risk of the mathematical provision within a fair valuation context. Through the VaR calculation, the estimate of an appropriate contingency reserve is connected to the predicted worst case additional cost, at a specific confidence level, projected over a fixed accounting period. The numerical complexity is approached by means of a simulation methodology, particularly suitable also in the case of a large number of risk factors.

Life Insurers’ Asset-Liability Dependency and Low-Interest Rate Environment

In this paper we study the relationships between life insurers’ assets and liabilities and investigate how it evolved during the most recent years of unprecedented low interest rates. We use a canonical correlation analysis to measure the relationships among, and between, asset and liability accounts for the main EU life insurers in the years 2007, 2011 and 2015. We find strong and substantial evidence that assets and liabilities have become more independent over time. We argue that the declining trend of market interest rates has contributed to the generalized reduction in the linkage between the asset side and the liability side of EU life insurers, leaving them more exposed to ALM-related risks relative to the period before the financial crisis.

Back to the Future: Prospective Bank Risk Management in a Financial Analysis Perspective

There is a general tendency to consider that, being 2012 and 2013 years of regulatory repair, the overall condition of European Union (EU) banks has improved since they raised equity and cleaned up their balance sheets. Nevertheless, the selected regulatory strategies are not free from shortcomings. Within this context, the aim of the chapter is twofold. The leading target is the inference of the logical background of risk assessment by the European Banking Authority (EBA) by means of the analysis of the Key Risk Indicators (KRI), with reference to both their selection and construction. The objective is the appraisal of the signalling aptitude of the KRI in order to deduce the risk-management focus by committed authorities. The secondary goal is the assessment of the recalled trend within Euro area banks in order to verify whether the regulatory focus is effectively generalized across the European Economic Area (EEA). Therefore, the chapter is aimed at evaluating future trends in banking risk management within the supervisory framework according to the actual suasion pursuit.

Bifactorial Pricing Models: Light and Shadows in Correlation Role

In modern option pricing theory many attempts have been accomplished in order to release some of the traditional assumptions of the Black and Scholes [5] model. Distinguished in this field are models allowing for stochastic interest rates, as suggested for the first time by Merton [20]. Afterwards, many stochastic interest rate models to evaluate the price of hybrid securities have been proposed in literature. Most of these are equilibrium pricing models whose parameters are estimated by means of statistical procedure, requiring a considerable computational burden. The recent financial crisis and the resulting instability of relevant time series may sensibly reduce the reliability of estimated parameters necessary to such models and, consequently, the calibration of the models. In this paper we discuss an original numerical procedure that can efficiently be adopted to the aim of pricing and the question of the correlation contribution in pricing framework. The procedure accounts for two sources of risk (the stock price and the spot interest rate) and, by means of an empirical evaluation tries to asses the relative contribution of the correlation component. The final target is to evaluate the “optimal” computation burden in pricing framework, given scarce dataset We show that the procedure proposed is a valuable compromise between computational burden and calibration efficiency, mainly because it overcomes difficulties and arbitrary choices in the estimation of the parameters.

Valuation of the Conditional Indexation Option in Asset and Liability Management of Defined Benefit Pension Funds

Pension funds have adopted different management approaches to overcome the arising difficulties to maintain a solid financial status. Among these, there is the adoption of an indexation policy which is conditional on the solvability of the fund. Pension funds recognizing conditional inflation indexation are obliged to pay an additional payoff linked to the inflation rate through some specific rule. The additional payoff normally takes the form of a contingent claim conditional to a measure of sustainability of the payoff itself; in most cases, the measure is linked to an asset/liability ratio able to capture the solvability of the fund. Therefore, a full valuation of the obligation towards funds participants cannot exclude the proper appraisal of this additional option. The option payoff is conditional to a measurement asset that is different from the reference underlying asset. This structure recalls a barrier option with different measurement and payoff asset. The paper investigates the opportunity to apply barrier option schemes in an asset/liability context to provide a full valuation of the obligation towards participants. Results derive from a simulation procedure applied by means of scenario-based analysis. Numerical results give the opportunity to state the absolute and relative value of the inflation option.

A Dynamic Solvency Approach for Life Insurance

The paper investigates risk management processes in life insurance, in a perspective consistent with the framework of Solvency II. The paper starts with the breakdown of the business dynamics. This analysis provides for a complete depiction of risk and value driver within life business. The corresponding map is then put into the solvability context, in order to formally identify the equilibrium conditions. Considerations about the technical equilibrium of an insurance portfolio and the financial regulation lead to a dynamic system of solvency assessment. The formal model is applied to a life annuity cohort in a stochastic context in order to exemplify the potential of the model, especially referred to the need to frame solvency assessment in a dynamic perspective.

Risk Identification and Measurement in Life Insurance: Critical Issues (Identificazione E Misurazione Dei Rischi Nei Portafogli Vita: Spunti Critici Di Riflessione)

The paper offers an insight into life insurance risk management topics with reference to recent regulatory innovation. The study starts with a full breakdown of the risk system of life insurance companies and provides a methodology of identification of risk drivers pertinent to both current earning and market value approaches. By means of the differential analysis, we are able to build up a whole series of risk indicators serving the whole risk management process. Such indicators can be easily plugged into the risk-adjusted performance metrics for both internal and institutional control targets. The methodology is applied to an exemplar case of a life annuity portfolio.