Stavros A. Zenios
     HERMES Center on Computational Finance and Economics
     University of Cyprus and The Wharton Financial Institutions Center

Endowments with a minimum guaranteed rate of return appear in insurance policies, pension plans and social security plans. In several cases, especially in the insurance industry, such endowments also participate in the business and receive bonuses from the firm's asset portfolio. In this paper we develop a scenario based optimization model for asset and liability management of participating insurance policies with minimum guarantees. The model allows the analysis of the tradeoffs facing an insurance firm in structuring its policies as well as the choices in covering their cost. The model is applied to the analysis of policies offered by Italian insurance firms. While the optimized model results are in general agreement with current industry practices,  inefficiencies are still identified and  potential improvements are suggested.

References:

A.Consiglio, F. Cocco and S.A. Zenios, Scenario optimization asset and liability modeling for endowments with guarantees, Working paper  00-41, The Wharton Financial Institutions Center, The Wharton School, University of Pennsylvania, PA, 2000. (http://fic.wharton.upenn.edu/fic/wfic/papers/00/p0041.html)

S.A. Zenios et. al. , Dynamic models for  fixed-income portfolio management under uncertainty,   Journal . of Economic Dynamics and Control, 22: 1517--1541, 1998.