Optimal investment decisions of the life insurance company in the presence of risk based capital standards
Date Issued
2005
Date
2005
Author(s)
Yu-Shu, Cheng
DOI
zh-TW
Abstract
We assume that the insurance company issues participating policies and nonparticipating policies, and then invest money in risky assets and riskless assets. In our assumption, interest rates and stock returns are not independent, so we use Cholesky decomposition to simulate returns of risky assets and riskless assets. Besides, the lapse rates are related to interest rates. The asset allocation and the product mix (different combinations of participating policies and nonparticipating policies) will have an impact on RBC ratio of the insurance company. In this article, we will change the risk weight of RBC, the expected value of long term interest rate, the volatility of stock returns, and participation level to find the best investment strategy in the presence of RBC standards. The results are as follows:
1. Since risky assets have highest risky weight, the insurance company will conserve its capital by allocating fewer assets to risky assets.
2. When the risky weight of asset risk (C1) decreases, the insurance company will invest more money in risky assets.
3. It would be better for the insurance company to invest more money in risky assets if the volatility of stock returns increases.
4. If the the expected value of long term interest rate is much higher than the pricing rate of
nonparticipating policies, the lapse rate of nonparticipating policies will be high. So the proportion of participating policies in product mix is high. The insurance company will invest more money in riskless assets to obtain stable asset returns.
5. If the expected value of long term interest rate is much lower than the pricing rate of
nonparticipating policies and participating policies, it would make negative impacts on profits of the insurance company. The insurance company will invest more money in riskless assets in order to meet risk-based capital requirements.
Subjects
風險基礎資本額
分紅保單
不分紅保單
克萊思基分解
Cholesky decomposition
paticipating policy
nonpaticipating policy
Risk-based capital
Type
thesis
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