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The Effect on Reducing Insolvency

The Effect on Reducing Insolvency

by Asset Mix of Life Insurance Company

by Asset Mix of Life Insurance Company

Yoshio Omori, Yuji

Yoshio Omori, Yuji

Ide

Ide

,

,

March 21 2002

March 21 2002

Nobuyuki

(2)
(3)

1.1

1.1

Shift of GDP & Interest

Shift of GDP & Interest

7.5 6.57.3 9.3 13.3 11.9 8.68.8 11.2 5.7 10.2 11.1 11.12.9 0 10.3 4.4 8.48.0 -1.2 3.1 4.04.4 5.35.5 2.82.83.1 2.3 3.84.4 3.0 4.5 6.5 5.35.3 3.1 0.9 0.41.0 1.6 3.5 1.8 -1.1 0.1.85 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0

1956

1961

1966

1971

1976

1981

1986

1991

1996

4.00 5.50 6.00 6.25 5.75 3.75 2.752.00

(4)

Total Assets (Unit:billion yen) No Life Ins. Company Time of Insolvency 1995 1996 1997 1998 1999 2000 1 Nissan Apr.1997 2,499 2,060 - - - - 2 Toho Jun.1999 4,167 4,509 3,001 - - - 3 Daihyaku May 2000 3,527 3,318 2,762 2,467 - 1,193 4 Taisho Aug.2000 238 233 228 231 204 104 5 Chiyoda Oct.2000 6,442 5,816 5,028 4,359 3,501 - 6 Kyoei Oct.2000 5,763 5,725 5,245 5,080 4,609 4,099 7 Tokyo Mar.2001 1,556 1,468 1,328 1,239 1,095 - Total of Insolvent Life Ins. 24,689 23,132 17,595 13,379 9,411 5,397 Total of traditional Life

Ins.(except Insolvent 7Com)

184,976 160,464

(12.6%)

165,219 167,325 166,955 166,316

1.2

1.2

Shift of Total Assets of Insolvent Life

Shift of Total Assets of Insolvent Life

Insurance Companies

(5)

1.3

1.3

Shift of Total Assets of Merger Life

Shift of Total Assets of Merger Life

Insurance companies

Insurance companies

Total Assets (Unit:billion yen)

No

Life Ins.

Company

Time of

Merger

1995

1996

1997

1998

1999

2000

1

Meiji

16,629 16,709 17,045 17,281 16,846 17,469

2

Yasuda

Apr.2004

9,200

9,233

9,474

9,745 10,080 10,256

3

Daido

5,011

5,059

5,346

5,482

5,733

5,900

4

Taiyo

Apr.2004

6,445

6,703

6,825

6,969

7,081

7,266

(6)

Total Assets (Unit:billion yen) No Life Ins. Company Time of Insolvency 1995 1996 1997 1998 1999 2000 1 Nissan Apr.1997 2,499 2,060 - - - - 2 Toho Jun.1999 4,167 4,509 3,001 - - - 3 Daihyaku May 2000 3,527 3,318 2,762 2,467 - 1,193 4 Taisho Aug.2000 238 233 228 231 204 104 5 Chiyoda Oct.2000 6,442 5,816 5,028 4,359 3,501 - 6 Kyoei Oct.2000 5,763 5,725 5,245 5,080 4,609 4,099 7 Tokyo Mar.2001 1,556 1,468 1,328 1,239 1,095 - Total of Insolvent Life Ins. 24,689 23,132 17,595 13,379 9,411 5,397 Total of traditional Life

Ins.(except Insolvent 7Com)

184,976 160,464

(12.6%)

165,219 167,325 166,955 166,316

1.4

1.4

Shift of Total Assets of Insolvent Life

Shift of Total Assets of Insolvent Life

Insurance Companies

(7)

4% 46% 39% 2% 74% 12% 8% 70% 4% 3% 50% 35%

0%

20%

40%

60%

80%

100%

Traditional Life Ins. Non-Life faction Life Ins. foreign affiliated Life Ins.

Insolvent Life Ins.

Cash,Deposits and Savings Call-Loans Securities Loans Real Estates and Movables Others

1.5

1.5

Share of Assets in Life Insurance

Share of Assets in Life Insurance

Company

(8)

55%

14%

30%

87%

8%4%

100%

0%

0%

57%

9%

33%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Traditional Life Ins. Non-Life faction Life Ins. foreign affiliated Life Ins. Insolvent Life Ins.

Individual

Insurance

Individual

Annuities

Group

Insurance

Group

Annuities

Asset-Formation ins.

& Ann.

Others

1.6

1.6

Share of Liabilities in Life Insurance

Share of Liabilities in Life Insurance

Company

(9)

2.Effect of Assets Mix & Product

Mix on Reducing Risk

(10)

2.1

2.1

Risk-Return plane & Insolvency-Return

Risk-Return plane & Insolvency-Return

plane

plane

Risk

Return

Risk-Return Plane

Asset Mix

+Product Mix

Product Mix

Insolvency

Return

Insolvency-Return Plane

Asset Mix

+Product Mix

Product Mix

(1)

(2)

10%

(2)

(1)

Fig1.2

Fig1.3

(0.02987,0.0311)

(0.00041,0.0285)

(0.1,0.0311)

(0.1,0.0285)

(11)
(12)

3.1

3.1

Base Rate of Calculating

Base Rate of Calculating

( Policy Term 15 years, from Age 30 )

Interest

rate

Mortality

Operating

expense rate

2.7%

l996 life table

Expected Rate

P

×

e

Actual Rate

interest rate based on

general probability model

the process of mortality based

on binomial distribution

the process of operating

expense rate based on inflation

rate

(=3% (r

0

)

×

0.9)

(10% probability

of Insolvency)

(13)

3.2

3.2

Amounts of scheduled payment at

Amounts of scheduled payment at

maturity and at death

maturity and at death

( gross premium = 1 )

Endowment

Special

Endowment

Term

12.24 %

expected

operating

expense rate

Sums

payable at

maturity

11.67 %

12.20 %

S’= 16.232

S’= 13.508

S’= 0

S= 16.232

S= 135.08

S= 697.90

Sums

payable at

death

(14)

3.3

3.3

General Probability Model

General Probability Model

a

b

σσσσ

0.5

0.5

0.5

1.0

γγγγ

Invest 1

Invest 2

Invest 3

Inflation

rate

1.0

1.367

1.6545

1.0

1.0

1.0

1.0

1.0

1.0

1.1

1.2

1.0

3.0

3.0

3.0

1.0

0.5

0.5

0.5

0.5

αααα

ββββ

general form

dr

= a

(

b

α

- r)dt + r

γ

σβ

dZ

(15)

1.0

ρ

ρ

1.0

Invest 1

Invest 2

Invest 3

Invest 1

Invest 2

Invest 3

Inflation

rate

Inflation

rate

1.0

1.0

1.0

ρ

ρ

1.0

3.4

3.4

Correlation Coefficient (

Correlation Coefficient (

ρ

ρ

)

)

Assume the correlation coefficient (

ρ

) between investment

(16)

3.5

3.5

Asset Share Simulation

Asset Share Simulation

2 Probability of insolvency

1 Risk / Return

Probability of insolvency is defined as the probability

that the asset share (at maturity) is below the liability reserve.

* Return is defined as the average of return rate.

* Risk is defined as standard deviation of return rate.

(17)
(18)

4.1

4.1

Effect of Product Portfolio on

Effect of Product Portfolio on

Reducing Risk

Reducing Risk

Figure 3.3 Effe c t of produc t portfolio on re duc ing ins olve nc y i in ris k- re turn re lations hip j

0.030 0.031 0.032 0.033 0.034 0.035 0.036 0.000 0.002 0.004 0.006 0.008 ris k

(19)

4.2

4.2

Effect of Product Portfolio on

Effect of Product Portfolio on

Reducing insolvency

Reducing insolvency

Figure3.4 Effect of product portfolio on reducing ins olvency i in ins olvency- return relations hip j

0.030 0.031 0.032 0.033 0.034 0.035 0.036 0 2 4 6 8 10 12 ins olvency( “)

(20)

4.3

4.3

Probability of Insolvency by source of

Probability of Insolvency by source of

profit for Product Portfolio

profit for Product Portfolio

Profit from

all source

Investment

Profit

Mortality

Profit

Expense

Profit

Endowment Special

Endowment

Term

Product

Portfolio

(E:T=7:3)

10.0 %

10.0 %

10.0 %

4.4 %

35.5 %

35.1 %

32.0 %

34.2 %

35.7 %

36.1 %

36.2 %

36.3 %

0.0 %

0.0 %

0.0 %

0.0 %

Single Product

(21)

5.Structure Analysis of the

(22)

5.1

5.1

Correlation Coefficient by Source

Correlation Coefficient by Source

of Profit

of Profit

Correlation Coefficient Endow ment Term Invest Mortality Expense Expense

Mortality Expense Invest Mortality

Endowment Term Invest Mortality Expense Invest 1.000 -0.008 0.665 0.476 0.475 -0.029 1.000 -0.011 -0.006 -0.005 0.856 -0.268 1.000 1.000 -0.034 1.000 -0.027 -0.019 -0.034 1.000 1.000

(23)

5.2

5.2

Relation between Sources of Profit and

Relation between Sources of Profit and

Total Profit

Total Profit

Endowment insurance

Term insurance

eac h source of pro fi t eac h source of pro fi t

(24)
(25)

Thank You

(26)

-Thank You

Figure

Figure 3.3 Effe c t of produc t portfolio on re duc ing ins olve nc y i in ris k- re turn re lations hip  j

References

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