A Study on the Systematic Risk and its Impact on the Life Insurance Market

In Taiwan, the total assets of the life insurance markets have reached NT18.6 billion at the end of 2014. Following this trend, an insurer should maintain prudent asset allocation strategies to prevent the mismatch from asset and liability. From the historical data, the net value of the life insurance company has high correlation with stock market, called systematic risk. Systematic risk cannot be removed by asset portfolio and has “event-trigger” property. In this research, we add the jump diffusion process to model the stock price dynamic process. We use a sample retirement insurance to fit in the liability side. With asset and liability models, we can do the liability adequacy test to find out the probability and default value when life insurance companies face systematic risk. The research shows that: (a) Compared to the B-S model, the jump diffusion process shows higher default probability and absolute value of default value. (b) Higher leverage, the mean of the stock, higher risk premium of the liability, and higher elasticity of the interest rate on the liability will cause higher default probability and absolute value of default value.