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ESSAYS ON DEFINED BENEFIT PENSION PLAN AND REINSURANCE MARKET
Zhai, Dekun
Zhai, Dekun
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Thesis/Dissertation
Date
2024-08
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Business Administration/Risk Management and Insurance
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http://dx.doi.org/10.34944/dspace/10654
Abstract
This dissertation comprises three essays that explore critical aspects of defined benefit (DB) pension plans and the reinsurance market. The first two essays focus on the funding management and risk transfer activities within DB pension plans, while the third essay investigates the impact of reinsurance utilization on loss reserve errors in the property-liability insurance industry.
In the first essay, we examine the increasing importance of the Pension Benefit Guaranty Corporation (PBGC) premiums on the funding strategies of DB pension plans. Between 2008 and 2020, single-employer plan sponsors paid over $50 billion in PBGC premiums, with $30 billion paid in the last five years. Our empirical analysis reveals that under the variable-rate PBGC premium structure, approximately 20.34% of plan-year observations show sponsors making additional voluntary contributions to achieve fully or over-funded status. The cap mechanism on variable-rate premiums incentivizes sponsors of underfunded plans to make voluntary contributions to improve their financial health. However, these incentives diminish for plans with longer ages when premiums reach the cap, leading to potential risk-shifting behaviors.
The second essay addresses the growing trend of pension risk transfers (PRTs), where sponsors transfer pension risks to third-party insurers or employees. This study investigates whether voluntary contributions by sponsors influence the likelihood of conducting PRTs. Utilizing data from the PBGC Comprehensive Premium Filings, we find that sponsors making short-term voluntary contributions are more likely to engage in PRTs, indicating these contributions serve as a preparatory measure to stabilize pension plan financial health and protect employee benefits. Conversely, long-term voluntary contributions are less likely to precede PRTs, reflecting sponsors' incentives to maintain and improve their pension plans. The impact of short-term contributions is more pronounced in underfunded plans, while overfunded plans show no significant relationship with PRT likelihood.
The third essay explores the reinsurance market, focusing on how reinsurance utilization affects loss reserve errors in property-liability insurance companies. Using both traditional loss reserve errors (TRE) and Full Information Reserve Errors (FIRE) approaches, the empirical results indicate that insurers purchasing more reinsurance tend to underestimate their loss reserves under the TRE method. However, the impact on loss reserve estimations is reduced for insurers that rely less on reinsurance contracts and after the catastrophe. Additionally, the concentration of reinsurance relationships shows a positive correlation with overestimation of loss reserves and the impact is less significant under the FIRE method. Lastly, we find that the sustainability of ceding insurer-reinsurer long-term relationship has significant effects on loss reserve estimations.
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