Nadine Gatzert: “Management Strategies in Life Insurance: An Examination with Respect to Risk Pricing and Risk Measurement“ Thomas Berry-Stölzle ARIA Annual Meeting August 5-8, 2007 Terry College of Business University of Georgia

T. Berry-Stölzle University of Georgia Simulation analysis of the influence of management strategies on risk-neutral pricing and “real world” default risk of life insurance companies. Previous literature: 1.Financial / no-arbitrage / risk-neutral pricing of life insurance liabilities. 2.Simulation analyses of management strategies. Background

T. Berry-Stölzle University of Georgia Model: Life insurance company with annual interest rate guarantee, annual surplus participation and terminal bonus (cliquet-style guarantee). Monte Carlo Simulations. Calibrate model such that insurance premium is “fair” (no arbitrage) for a pre-specified safety level. Model output: “Real world” shortfall probability of insurance company. Analyze impact of 3 different management strategies on output. Analysis

T. Berry-Stölzle University of Georgia 1.Shows influence of management strategies on risk neutral pricing. 2.Shows how management strategies influence “real world” default risk for a given set of risk-neutral parameters. 3.Extends risk-neutral valuation principle. Contribution

T. Berry-Stölzle University of Georgia 1.Analysis basically introduces risk-reducing management strategies and re-calibrates guarantees/surplus participations such that the insurer’s safety level in the risk-neutral world stays constant. This changes the insurer’s default risk and, hence its safety level in the “real” world. a.Explain this interaction in more detail. b.Seems to be driven by annual surplus participation. c.Symmetric risk measures in Black-Scholes word vs. asymmetric downside risk measures in “real” world. 2.Model fixes safety level in risk-neutral world and examines real world risk measures. Doing it the other way around would help to further examine the relationship between the two worlds. Comments (1)

T. Berry-Stölzle University of Georgia 3.Model calibration calculates surplus participation parameters for given interest rate guarantees. Fixing the annual surplus participation instead would help to further understand the dominant role of the annul surplus participation. 4.Paper is hard to read: Uses buzz words without defining them. 5.Model is continuous; the numerical calculations, however, are based on a discretization. This should be explained more clearly. 6.From my point of view, the contribution of the paper is not clearly stated. The literature review should be more focused (creating a lack) and the rest of the paper should follow this central theme. Comments (2)

T. Berry-Stölzle University of Georgia 1.Number of Monte Carlo Simulations is missing. 2.Justify the assumed values for  (CAPM). 3.On p. 14: “… in Table 2 for … of 2.5%” should be 1.5%. 4.When describing the management strategies on p. 12 you should also mention that  will be adjusted accordingly. Minor Remarks

T. Berry-Stölzle University of Georgia Conclusion Paper contributes in depth valuation of the impact of management strategies on risk-neutral pricing of life insurance contracts. A more focused storyline would strengthen this advantage.