Hostname: page-component-8448b6f56d-dnltx Total loading time: 0 Render date: 2024-04-18T03:13:49.327Z Has data issue: false hasContentIssue false
  • English
  • Français

Evaluating pension insurance pricing*

Published online by Cambridge University Press:  08 April 2015

DAVID F. BABBEL
DAVID F. BABBEL*
Affiliation:
The Wharton School, University of Pennsylvania, Senior Advisor and Practice Leader of Insurance Economics, Charles River Associates, 1155 Avenue of the Americas, 18th Floor, New York, NY 10036, USA (e-mail: babbel@wharton.upenn.edu)
Get access Rights & Permissions [Opens in a new window]

Abstract

The Pension Benefit Guaranty Corporation's (PBGC) Pension Insurance Modeling System model has taken on the Herculean task of modeling in detail and under many scenarios the cash outflows associated with the pension obligations, they have assumed. This paper's comments are focused almost entirely upon the PBGC's termination liabilities, and address four pressing issues: (1) the need to discount the liability stream by current riskless interest rates instead of using corporate bond rates that reflect credit risk, call risk, and other risks, or using some ad hoc prescribed average of past rates; (2) the need to use a term structure of interest rates; (3) the need to employ more useful investment management benchmarks; and (4) how to implement a relevant and rigorous liability benchmark.

Keywords

G22H55J32Pension valuationDiscount rateInsurance
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 14 , Issue 2: Special Issue on Assessing the U.S. Pension Insurance Modeling System (PIMS) , April 2015 , pp. 186 - 201
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Arnott, R. D. (2005) The pension problem: on demographic time bombs and odious debt. Financial Analysts Journal, 61(6): 12–17.Google Scholar
Babbel, D. F. (1983) Duration and the term structure of interest rate volatility. In Bierwag, G., Kaufman, G. and Toevs, A. (eds), Innovations in Bond Portfolio Management: Duration Analysis and Immunization. New York: JAI Press, 239–265.Google Scholar
Babbel, D. F. (1992) Measuring investment performance in an asset/liability context. In Managing Asset/Liability Portfolios. Charlottesville, VA: Association for Investment Management and Research.Google Scholar
Babbel, D. F. and Merrill, C. (2000) Valuation of Interest-Sensitive Financial Instruments, revised ed. Society of Actuaries, Hoboken, New Jersey: Wiley Publishers.Google Scholar
Babbel, D. F. and Merrill, C. (2005) Real and illusory value creation by insurance companies. Journal of Risk and Insurance, 72(1): 1–21.CrossRefGoogle Scholar
Babbel, D. F., Stricker, R. and Vanderhoof, I. T. (1990) Performance measurement for insurers. In Financial Institutions Research. New York, NY: Goldman Sachs.Google Scholar
Babbel, D. F., Stricker, R. and Vanderhoof, I. T. (1994) A modern approach to performance measurement for insurers. In D'Ecclesia, R. L. and Zenios, S. A. (eds), Operations Research Models in Quantitative Finance. Heidelberg, Germany: Physica-Verlag, 3–17.Google Scholar
Bulow, J. I. (1982) What are corporate pension liabilities? Quarterly Journal of Economics, 97(3): 435–452.Google Scholar
Bulow, J. I., Mørck, R. and Summers, L. H. (1987) How does the market value unfunded pension liabilities? In Bodie, Z., Shoven, J. B. and Wise, D. A. (eds), Issues in Pension Economics. Chicago, IL: University of Chicago Press, 81–104.Google Scholar
Dybvig, P. H. and Marshall, W. J. (1996) Pricing long bonds: pitfalls and opportunities. Financial Analysts Journal, 52(1): 32–39.Google Scholar
Gurkaynak, R. S., Sack, B. and Wright, J. H. (2007) The U.S. treasury yield curve: 1961 to the present. Journal of Monetary Economics, 54(8): 2291–2304 (with data posted at: http://www.federalreserve.gov/pubs/feds/2006).Google Scholar
Merton, R. C. (1974) On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance, 29(2): 449–470.Google Scholar
Sack, B. (2000) Using Treasury STRIPS to Measure the Yield Curve. FEDS Working Paper 2000–42. Washington, DC: Division of Monetary Affairs, Federal Reserve Board of Governors.Google Scholar
Santomero, A. M. and Babbel, D. F. (2001) Financial Markets, Instruments and Institutions, 2nd ed.New York, NY: McGraw-Hill Irwin.Google Scholar