The impact of illiquidity on the capital requirements of insurers facing long-term liabilities in a risk-based environment

  • Jasper Koops Jasper Koops

This thesis analyzes the impact of applying the matching adjustment asdescribed in Solvency II to a stylized insurance company. To this end, this thesis uses a one-factor Cox-Ingersoll-Ross model in which the second factor is related to illiquidity. The average estimated illiquidity premium equals approximately 26bps on German Pfandbriefe and 102bps on the iBoxx € Corporates A 3-5 bond index. The impact on the present value of the liabilities ranges from 4-7%, depending on the height of the matching adjustment. This thesis also shows that an incorrect estimation of the illiquidity premium can pose severe risks to the policy holder in terms of lower premium payments.

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