Cummins et al. (1994) provide a conceptual framework for policymakers to use in analysing risk-based capital systems. Based on their framework, this article provides an overview and critical analysis of risk-based capital requirements, with a focus on property/ casualty insurance, as implemented in three regions of the world (the United States, the European Union and Switzerland). To integrate the dynamics of the insurance and capital markets and recent developments in regulation we add four new criteria to the original framework of Cummins et al. The analysis reveals various shortcomings of the standards used in the United States and indicates a need for reform in that country. In contrast, the Swiss standards and the framework planned for the European Union perform generally well. It is, however, not yet possible to identify which of these two systems is superior, as empirical evidence on their effectiveness in protecting policyholders is still lacking.
The value of a life insurance contract may differ depending on whether it is looked at from the customer's point of view or that of the insurance company. We assume that the insurer is able to replicate the life insurance contract's cash flows via assets traded on the capital market and can hence apply riskneutral valuation techniques. The policyholder, on the other hand, will take risk preferences and diversification opportunities into account when placing a value on that same contract. Customer value is represented by policyholder willingness to pay and depends on the contract parameters, that is, the guaranteed interest rate and the annual and terminal surplus participation rate. The aim of this article is to analyze and compare these two perspectives. In particular, we identify contract parameter combinations that-while keeping the contract value fixed for the insurer-maximize customer value. In addition, we derive explicit expressions for a selection of specific cases. Our results suggest that a customer segmentation in this sense, that is, based on the different ways customers evaluate life insurance contracts and embedded investment guarantees while ensuring fair values, is worthwhile for insurance companies as doing so can result in substantial increases in policyholder willingness to pay.
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