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Insurance guaranty funds have been adopted in many countries to compensate policyholders for losses resulting from insurers' insolvencies. In this article we focus on the risk-based premiums in ex ante insurance guaranty schemes since a preassessment mechanism could reduce the shareholders' incentive to engage in risk-taking behavior. We derive the closed-form solutions of the risk-based premium charged by the insurance guaranty fund in a setting that incorporates financial leverage, asset allocation, early closure, and capital forbearance during the grace period. Most importantly, we assume that the interest rate is stochastic, and we find that the premium is underpriced if the uncertainty of the interest rate is neglected by the insurance guaranty fund. Moreover, the influence of stochastic interest rate for the premium is more significant when we consider the capital forbearance mechanism. The impacts of the key factors in our model that decide the fair premium of the guaranty fund are examined numerically. The results of our analysis could provide valuable insights for regulators in terms of revising regulatory policies and insurance guaranty schemes. INTRODUCTIONLife insurance companies are highly leveraged financial institutions whose liabilities are formed by the policyholders' premiums that render the institutions responsible for meeting the claim obligations over a lengthy coverage period. The statutory reserves and the shareholder's fund on the balance sheet of the insurers are invested in marketable securities between the inception of an insurance contract after the initial premium is collected and the date on which a claim for insurance benefit should be paid. The reserves make up the principal proportion of the life insurer's liabilities. As much as deposit insurance is widely used to meet the bank's obligations to depositors when the bank fails, it is necessary to develop a similar guaranty scheme to protect the rights of policyholders, an approach that is referred to as the insurance guaranty fund established by the financial authority. 1 The essential purpose of the guaranty fund is to stabilize the insurance system in ways such as covering certain claim obligations of insolvent insurers. Cummins (1988) points out that the establishment of a guaranty fund means that the costs associated with an insolvent insurer should be spread throughout the insurance system.Both preassessment and postassessment approaches are adopted to cover these insolvency costs. The postassessment scheme, which is applied by the United States and the United Kingdom, means that the obligations of the insolvent insurance company will be distributed among other insurers in the same financial market. Krogh (1972) mentions that postassessment schemes provide incentives for sound financial supervision of insurers; however, Han et al. (1997) show that the postassessment approach tends to foster insurers' risk-taking behaviors.On the other hand, under the ex ante assessment approach, all insurers have to regularly pay a premium to ...

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Around the world, the longer life expectancy of the population raises important questions for policy-makers about how citizens can maintain their basic standard of living after retirement. Pension schemes tend to be the major source of retirement incomes, at least, in the developed world. Facing this aging problem, the Taiwanese government offered persons insured under the Labor Insurance Pension Scheme the choice of whether or not to annuitize their retirement benefits from January 1, 2009. Following the implementation of this pension program, the insured may now select the old-age one-time benefit or a monthly pension benefit when they retire. The puzzle is that very few people would choose to annuitize their wealth in practice. This is contrary to the suggestions made by the financial literature. In this study, we apply the liquidity premium and the implied longevity yield (ILY) to compare the old-age onetime benefit with the monthly pension benefit. The results demonstrate that the ILY minus the risk-free rate is greater than the liquidity premium in most scenarios and these findings encourage the insured to choose the old-age pension benefit. This result is consistent with the financial literature. Moreover, we find that those insured with the lowest insurance salary and fewer years of coverage earn the highest ILY. This shows that the program has been designed with the purpose of wealth re-distribution.

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