Book contents
- Frontmatter
- Contents
- List of contributors
- Foreword
- Preface
- Acknowledgments
- Part I General overview
- Part II Models
- 5 An economic approach to valuation of single premium deferred annuities
- Commentary by D.F. Babbel
- 6 The optimal portfolio system: targeting horizon total returns under varying interest-rate scenarios
- 7 Optimization tools for the financial manager's desk
- 8 A flexible approach to interest-rate risk management
- 9 Currency hedging strategies for US investment in Japan and Japanese investment in the US
- Commentary by Y. Beppu
- Part III Methodologies
- Index
5 - An economic approach to valuation of single premium deferred annuities
Published online by Cambridge University Press: 09 February 2010
- Frontmatter
- Contents
- List of contributors
- Foreword
- Preface
- Acknowledgments
- Part I General overview
- Part II Models
- 5 An economic approach to valuation of single premium deferred annuities
- Commentary by D.F. Babbel
- 6 The optimal portfolio system: targeting horizon total returns under varying interest-rate scenarios
- 7 Optimization tools for the financial manager's desk
- 8 A flexible approach to interest-rate risk management
- 9 Currency hedging strategies for US investment in Japan and Japanese investment in the US
- Commentary by Y. Beppu
- Part III Methodologies
- Index
Summary
Introduction
The 1980s have been a trying decade for life insurers. Volatile interest rates, new competition from other sectors of the financial services industry, and tightening investment spreads are some of the major new forces that have challenged the industry. The response has been to offer new products (the so-called “interest-sensitive” products), to promise higher rates, and to assume investment risks associated with higher book yields. The combination of these three actions has placed the industry in a precarious position as it faces the new decade.
Figure 5.1 shows interest rates during the 1980s for both six-month Treasury bills and thirty-year Treasury bonds. To help recap the developments that have shaped the industry, we have included three milestones (labeled A, B, and C). The first milestone (A) occurred during the early part of the decade when short-term rates shot to record heights. This caused disintermediation as policyholders fled to higher yielding alternatives offered in the capital markets (e.g., money market mutual funds). Associated with this flight to yield was the need for insurers to liquidate assets at a loss to meet the outflow. Policyholders' exercise of the options to surrender their policies, or to take out policy loans at substantially below-market interest rates, caused insurers both economic and accounting losses.
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- Information
- Financial Optimization , pp. 101 - 131Publisher: Cambridge University PressPrint publication year: 1993
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