Research On The Optimal Asset Allocation And Risk-taking Decisions Of Insurers

Pension risk has been plaguing the pension sponsors(or Trustees).In recent years,many insurers at home and abroad manage the pension risk efficiently and systematically by issuing insurance annuities.Especially in countries such as Britain and America,special annuity insurers can manage pension risks effectively by issuing different annuity products on the market.For example,by the end of 2016,Legal & General,Pension Insurance Corporation(PIC)and Prudential have issued a total size of 20 billion dollars for the buy-ins and buy-outs annuity.The trading volume of insurance annuities increased gradually on the one hand will increase the insurer's business scale and improve its operating income,but at the same time,the insurer also undertakes more and more pension risk,such as longevity risk,interest rate risk,inflation risk and investment risk etc..These risks make the insurer's overall financial status and core business strategy have a significant impact on the insurer's business scale,investment and financing strategy,solvency and risk management and other important decisions of the company.For example,the latest report of A.M.Best shows that due to the impact of capital market volatility and longevity risk,by the end of 2016,the operating profit in the United States annuity industry has decreased significantly,and most of the insurer's credit rating from the original operating stability rating into business poor performance level.In order to change the company's financial distress and poor credit rating situation,insurers often through the adjustment of the company's risk taking,asset allocation and risk management decisions to increase the company's total earnings quickly,improve the company mismanagement,and even trapped on the verge of bankruptcy.How to explain the above performance-dependent risk preference and the negative relation between risk and return of annuity insurers? Understanding this is important because it affects an insurer's optimal investment and business decisions.Under the uncertainty of the external economic environment and the company's internal financial changes,how can the insurers optimize their resource allocation and risk decisions under such uncertain environment? The traditional expected utility theory(EUT)that the decision-makers in making any decisions on the principle of utility maximization,and assumes that the decision-makers are completely rational,and all the decision-making behavior is consistent in logic,can grasp the complete information when making decisions,and to make a rational judgment of objective events however,the theory goes against the people in the real life of the uncertainties in the real choice.In reality,people can not grasp the complete information and judge the effectiveness of all choices objectively and objectively,so the decision-making behaviors are not be completely rational and based on utility maximization.A lot of empirical research results and observations on annuity insurance market show that decision-makers no longer follow the traditional decision theory in decision-making process,and show more complex risk decision-making behavior.It is usually a change in a different wealth,not a consistent risk aversion.Therefore,in order to better explain the real decision behavior in insurer risk under uncertain process,based on the research at home and abroad,considering the insurer in the uncertain behavior under the influence of decision-making and limited rationality on the business decision-making,this paper innovatively introduced Kahneman and Tversky(1992)the cumulative prospect theory(CPT),the limited rational decision makers in an uncertain environment,more realistic decision.Under the framework of CPT,the risk preference of insurers under uncertain environment is constructed from a new perspective.Under the premise of maximizing the company's wealth utility,the optimal asset allocation and optimal behavior decision of an insurer are obtained.Under the framework of CPT,the important risk management decision of reinsurance is introduced and studied.Under the framework of CPT,this paper analyzes the influence of the introduction of reinsurance on the optimal behavior decision of insurers from a new perspective.In past studies,CPT is mainly used to study securities pricing,innovative investment and company resource allocation.CPT is not used to study the optimal risk management decisions of companies.In view of the risk decision-making behaviors of policymakers who are generally entitled to avoid risks and pursue risks,this paper expounds how the risk management decision of reinsurance affects the value of insurers and the best behavior decisions.The final result shows that reinsurance decision can effectively improve the total value of insurer and reduce the risk motivation of decision-makers to a certain extent.This conclusion has certain guiding significance and practical application for insurer's optimal risk decision.This article mainly from the basic theory summary,the basic model hypothesis,the insurer's operation structure,the insurer's best decision analysis,the optimal reinsurance decision analysis,the sensitivity analysis,as well as the main conclusion and the prospect and so on,carries on the analysis gradually,the specific contents are as follows:Section 1 is the introduction.This chapter mainly elaborates from four aspects,namely the research background and significance of research;and related theory research literature at home and abroad are summarized;and based on the basic ideas and methods of the research purpose this paper puts forward the research;finally combed the contents of the thesis and the research framework.Section 2 is the basic overview of CPT.This chapter is the theoretical basis of this thesis,introduces the basic model of PT theory and CPT,detailed content,in the basic model,including reference point,value function and weight function in the last three parts,mainly analyzes the forefront of the application of CPT and future development.On this basis,this paper expounds the necessity of using CPT to study the optimal asset allocation and risk decision of annuity insurance company.The third section is the basic model of the insurance company's management decision.This chapter is the basic theory of the model assumptions,the annuity insurance company management decision as an example,mainly from the structure of assets and liabilities to the analysis of business model of insurance companies,including the model of longevity risk mortality(using Lee-Carter model),basic annuity contract model,asset allocation model and structure model of insurance company earnings.Section 4 performs the optimal decision analysis of the insurance company.This chapter is the core part of the whole article.Based on the main outlines of CPT and the basic models of insurance company's business decision,the optimal decision-making of insurance companies is elaborated from two aspects: asset allocation and risk decision making.A numerical example is cited for analysis.In the third death rate model mentioned above,the parameter values in the Lee Carter(1992)model are evaluated by the two stage SVD method.According to the assessment steps of SVD,and based on the Human Mortality Database(1933 Mortality),the mortality rate of the male population in the US is evaluated by life table.According to Tversky and Kahneman(1992),in the model of this article,we use the value and the values of the value function.The results of the numerical analysis are in agreement with the behavior decisions and results of the annuity insurance companies we have observed.Therefore,in this paper,we use CPT to analyze the changing risk attitude of company decision-makers,and we can see the robustness of the model in the sixth chapter's parameter sensitivity analysis.Section 5 is the optimal decision analysis of reinsurance on the basis of the fourth chapter.The optimal decision on a chapter of the insurance company based on the results of the analysis,this chapter adds reinsurance,through optimal decision analysis and sensitivity analysis can be improved,reinsurance insurance companies operating effectiveness and reduce operating risk and impulsive behavior,promote effective and stable development of the insurance company.Section 6 is model sensitivity analysis.In this chapter,we study the effect of parameter selection on the optimal decision of annuity insurance companies.This paper mainly analyzes how the optimal decision is changed with the change of discount rate,premium parameter,VaR probability,absolute risk aversion coefficient and reinsurance cost parameter.The results show that the CPT model in this paper is robust to the change of parameter values.The last chapter is the conclusion and Prospect of the article.This chapter is the summary of the full text.Through the above basic theoretical elaboration and model analysis,we can draw the optimal decision-making behavior of annuity insurance company based on CPT and the change of optimal behavior decision after introducing risk management strategy.Combined with the classic case and the specific numerical analysis,the relevant suggestions are put forward for the insurance companies in the risk taking and risk decision of our insurance companies.The innovations of this paper include:(1)This paper innovatively introduced Kahneman and Tversky(1992)cumulative prospect theory(CPT),the limited rational decision makers in an uncertain environment,in more realistic decision.Under the framework of CPT,the risk preference of insurers under uncertain environment is constructed from a new perspective.Under the premise of maximizing the company's wealth utility,the optimal asset allocation and optimal behavior decision of an insurer are obtained.(2)In the CPT framework,the key point is to determine the reference point level value function,the level of the reference point of decision makers in decision-making under uncertainty is divided into risk aversion and risk preference,which is different from the EUT utility theory in the same risk aversion attitude.Although reference points are very important in the application of CPT,most studies regard reference points as an exogenous variable and ignore its inherent determinations.In order to emphasize the important role of reference points in the company's optimal decision-making process and the economic significance of reference points,this paper proposes a new method to determine the level of decision reference points.Considering that the main goal of a company is to maximize the value of the company,this article uses the profit value of the insurer as a way to measure the financial situation of the decision point.Based on the CPT,maximizing the total value of a company needs to satisfy the risk appetite constraint condition,that is,the total utility of the variable risk attitude to the company is no less than the total utility of the consistent aversive risk attitude to the company.In this paper,based on the risk preference constraints,the level of the decision reference point is obtained.Reference point of this method is determined by the utility function,CPT decision weighting function,financial situation and risk restriction factors such as the endogenous decision variables of dynamic variability,in line with the company's overall operational planning decisions and has certain economic significance.(3)In the framework of CPT,this paper analyzes the influence of the introduction of reinsurance important risk management decision on the optimal behavior decision of insurer from a new perspective.In past studies,CPT is mainly used to study securities pricing,innovative investment and company resource allocation.CPT is not used to study the optimal risk management decisions of companies.In view of the risk decision-making behaviors of policymakers who are generally entitled to avoid risks and pursue risks,this paper expounds how the risk management decision of reinsurance affects the value of insurers and the best behavior decisions.The final result shows that reinsurance decision can effectively improve the total value of insurer and reduce the risk motivation of decision-makers to a certain extent.This conclusion has certain guiding significance and practical application for insurer's optimal risk decision.