Analyzing legal regulations in the Norwegian life insurance business using a multistage asset–liability management model

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Abstract

The legal regulations for the life insurance business in Norway have recently been, and still are, under revision. The government's intention is to secure the interests of the customers in life insurance companies. However, there has been debate as to whether the regulations really are in the customers' best interest. We apply an asset–liability management (ALM) model to analyze the implications of the regulations. The model is multistage, stochastic and integrates assets and liabilities. We employ a four stage model to analyze the legal regulations, and conclude that the current legal framework is not in the insurance holders' best interests.

Section snippets

Introduction and motivation

In the literature on insurance economics, there are numerous studies on the reasons for and the impact of regulating insurance companies. According to Klein (1995)1, the primary goal of insurance regulations is to “protect policy holders and society in general against the incidence of insurer

Problem description

The presented model is developed for the Norwegian mutual life insurance company Gjensidige Livsforsikring. This section provides a problem and a model description. It is outside the intentions of this paper to examine life insurance in detail, but a brief explanation of its key elements will explain the modeling choices. Therefore, a short description of the products, the balance sheet and the risks faced by a life insurance company is provided, together with some of the modeling implications.

The model formulation

The applied model framework requires decisions to be made at discrete points in time and discrete probability distributions for the uncertain variables. The framework is illustrated by the scenario tree of which a two period (three stage) example is given in Fig. 1. The arcs in the tree represent realizations of the uncertainties, while the nodes represent decisions. The top node represents the decisions today and the nodes further down the tree represent conditional decisions in later periods.

Numerical results

The model described in Section 3 is solved by formulating the deterministic equivalent4 This section presents the numerical results from testing different legal frameworks. We study a mutual life insurance company5 and assume that the company invests in

Conclusions

A multistage stochastic asset–liability management model is employed to analyze the legal regulations in the Norwegian life insurance market. The most disputed regulation is the annual guaranteed rate of return. The analysis shows that this regulation is not in the insurance holders' best interest. The insurance holders would be better off with a guarantee over a longer period, or with no guarantee at all.

This paper has focused on one particular legal regulation. Future research can analyze

Acknowledgements

We want to thank Gjensidige Forsikring for supporting this research.

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