In its response to the CEIOPS consultation on the preliminary technical specifications for the fourth quantitative impact survey (QIS4), EDHEC argues that the main risk faced by life insurance companies is not taken into account in the standard formula.

Author(s) :

Samuel Sender

Research Associate with the EDHEC Risk and Asset Management Research Centre

This risk is that following market (or other significant) losses, a wave of surrenders leaves shareholders bearing the entirety of losses. This is the phenomenon that led to such bankruptcies as that of Executive Life, where losses made public by rating agencies and the media triggered a wave of surrenders and bankruptcy-even though the losses alone were thought bearable for some time. In this paper, we argue that such a combined risk can be taken into account only in a scenario in which high levels of surrenders are combined with market losses, and that market losses alone merely added to surrenders alone may not suggest any need for shareholder capital. We also argue that QIS4 has resulted in substantial practical improvements to the standard formula-in particular, guidelines as well as proxies that will allow the participation of smaller companies or of less strategic lines of business. These improvements are in line with our past recommendations for clear guidelines, as in previous works we pointed out that diverging interpretations of the necessary calculations could lead to significant differences in capital requirements as well as to an inability to compare results across insurance companies and countries. The recognition of geographical diversification within life and non-life lines of business is likewise a great improvement.
Pdf
QIS4: significant improvements, but the main risk for life insurance is not take...
(-1.00 B)
Type : Position paper
Date : le 19/02/2008
Extra information : Ce document constitue une synthèse de travaux scientifiques conduits au sein de l'EDHEC. Pour plus d'informations, nous vous prions de vous adresser à Joanne Finlay de la direction de la recherche de l'EDHEC : joanne.finlay@edhec.edu Les opinions exprimées sont celles de l'auteur et n'engagent pas la responsabilité de l'EDHEC.
Research Cluster : Finance

See Also

EDHEC Business School hosts the Family Business Extension  of the 38th Strategic Management Society (SMS) Annual Conference
News
- 18-05-2018
  Like in previous years, the 2018 Family Business Extension will bring together a...
Award
News
- 17-05-2018
Photo: Award-winning Messaoud Chibane, PhD (2016) and Alain Papiasse, BNP Paribas...
30 years of impact for EDHEC : A ceremony in honour of Olivier Oger
News
- 17-05-2018
Staff, professors, Alumni, historical partners: they have all met on the Nice and Lille...
PUBLICATION
News
- 16-05-2018
Jeroen Jansen’s article “Local Volatility and the Recovery Rate of Credit Default Swaps...