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The pricing of life insurance products on a regular basis in the interest rates under uncertainty

Author: LvYiChun
Tutor: LuAiQin
School: Shanghai Normal University
Course: Industrial Economics
Keywords: Life Insurance Pricing Stochastic Interest Rate Times Series
CLC: F224
Type: Master's thesis
Year: 2009
Downloads: 148
Quote: 0
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Abstract


With economics development, macroeconomic policy plays an increasingly important role in national economic stability. Interest rate instrument, as a vital monetary policy, is implemented more and more frequently. Over the period of economic slowdown, Center Bank is likely to decrease its interest rate in order to stimulate investment, on the other hand, when economic is overheated; Center Bank is often forced to raise interest rate to tame national economic and inflation. The problem of interest rate’s changing frequently has caused increasingly higher system risk based on interest rate. This kind of risk is caused by exogenous variable which is very difficult to reduce by itself. Insurance industry is such an industry that interest rate must be taken into account seriously. At the end of last century, the reason why so many insurance companies in Japan went bankrupt is mainly because of interest rate decline. Persistent decline of interest rate in Japan caused insurance companies in Japan heavy losses. In traditional process of premium calculation, insurance company will set an assumed interest rate in advance, based on which actuaries compute the premium of some product. Because life insurance often covers long term insurance, once assumed interest rate is set, it will decide an interest rate of some product for 20 or even 30 years later. Assumed interest rate in China maintained around 8% for a long time. Since 1999, it has reduced to around 2.5%. Because assumed interest rate is set in advance, the difference between assumed interest rate and real interest rate will cause a huge difference. On the basis of previous study, the author built a model by times series. Insurance companies can reduce system risk if the model is used to pricing insurance products. Under volatile economics conditions, premium is likely to increase because of frequently changes of interest rate, on the contrary, premium is likely to decrease because of the stability of interest rate over the period of steady economics conditions. Meanwhile, the author built a model by using processed interest rate data since 1979 and compared the premium by traditional actuarial model with that by the model this article introduced. In a word, the model this article introduced can evaluate insurance companies’premium level very well and reduce system risks of insurance companies effectively.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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