Abstract:In the context of the aging population, the debt risk and solvency situation of China's pension plan are of major concern for government and individuals. The aim of this paper is to project public pension liabilities and evaluate the solvency sustainability of China's pension reform during transition periods. By using cohort component and actuarial models, transition debt and solvency sustainability are projected under the existing policy scenario and several sets of hypothetical policy scenarios. We find that the transition liabilities will peak in 2035 and the pension plan will become unsustainable in 2048 under existing policies. In the proposed scenario, postponing retirement age helps to maintain pension plan sustainability until 2083, but this option can't solve the financial distress in the long run. Further, the transition pension debt will double in the peak moment if the retirement age is postponed for five years, which would pose a risk to the liquidity of the fund. Moreover, an increase to invest return can only improve the baseline solvency in short term. Sustainable options should be designed as composite reform measures, including retirement and investment adjustment.
Crisis events have significantly changed the view that extreme events in financial markets have negligible probability. Especially in the life insurance market, the price of guaranteed participating life insurance contract will be affected by a change in asset volatility which leads to the fluctuations in embedded option value. Considering the correlation of different asset prices, MEGB2 (multivariate exponential generalized beta of the second kind) distribution is proposed to price guaranteed participating life insurance contract which can effectively describe the dependence structure of assets under some extreme risks. Assuming the returns of two different assets follow the MEGB2 distribution, a multifactor fair valuation pricing model of insurance contract is split into four components: the basic contract, the annual dividend option, the terminal dividend option, and the surrender option. This paper studies the effect of death rate, minimum guaranteed yield rate, annual dividend ratio, terminal dividend ratio, and surrender on the embedded option values and calculates the single premium of the insurance contract under different influence factors. The Least-Squares Monte Carlo simulation method is used to simulate the pricing model. This article makes a comparison in the sensitivity of the pricing parameters under the MEGB2 distribution and Multivariate Normal distribution asset returns. Finally, an optimal hedging strategy is designed to cover the possible risks of the underlying assets, which can effectively hedge the risks of portfolio.
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