A risk-based premium: What does it mean for DB plan sponsors?

An Chen and Filip Uzelac

Insurance: Mathematics and Economics, 2014, vol. 54, issue C, 1-11

Abstract: This paper develops a risked-based premium calculation model for the insurance provided by the Pension Benefit Guaranty Corporation (PBGC). It takes account of the pension fund’s and the plan sponsor’s investment policy and extends Chen (2011) by considering distress termination triggered by the sponsor’s underfunding. We empirically illustrate our theoretical pricing formula for the 100 biggest American DB sponsoring companies. Our result clearly casts doubt on the current practice where about 70% of the PBGC premiums charged are flat. We observe that the funding ratio and the leverage are the main risk factors in a risk-based premium calculation.

Keywords: PBGC; Defined benefit plan; Distress termination; Correlation; Sponsor support (search for similar items in EconPapers)
JEL-codes: G13 G23 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:54:y:2014:i:c:p:1-11

DOI: 10.1016/j.insmatheco.2013.10.011

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