Department of Finance

 

Date of this Version

1995

Document Type

Article

Citation

Journal of Actuarial Practice 3 (1995), pp. 5-23

Comments

Copyright 1995 Absalom Press

Abstract

This paper uses an option pricing framework to estimate life insurer risk-based capital. Stock market data and statutory asset and liability data are used to calculate the implied level of statutory risk-based capital for each of 18 insurers. We calculate the level of risk-based capital required to avoid subsidy from the guaranty fund. Our results suggest that less capital is required than that required under the New York actuarial risk-based capital formula. Firm rankings, however, are similar under both methods, although the methods are not directly comparable. We also determine the level of capital required if the subsidy provided to the sample of insurers by a guaranty fund is the same as that provided by the Federal Deposit Insurance Corporation (FDIC) to U.S. banks. This level of capital is chosen because of the dominance of investment products for life insurers. When the results are compared with those found from a similar study of U.S. banks, it appears that the sample life insurers hold relatively greater capital than do the sample banks.

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