Research On IRR(Interest Rate Risk) Of Life Insurance Pricing

Life insurance is a kind of industry which deals in risks, so risks have string along with life insurance since it was born. IRR(Interest Rate Risk)of China's life insurance goes more outstanding because of a sequence of lowering interest rate in China since 1996.What the thesis studies is IRR of life insurance pricing, namely, Interest Spread Risk. Interest Spread Risk of life insurance is defined as the loss probability resulting from unfavorable variation of real investment return rate of life insurance capital from policy ordered fixed credit interest rate. Interest Spread Risk, which is one of important risks which life insurance is faced to, strongly threatens the solvency and working stabilization of life insurance. There are many experts and life insurance workers studying on Interest Spread Risk from qualitative or quantitative ways by the mean-variance method, but writer has not yet found who analyzes Interest Spread Risk by VaR technique.VaR (Value at Risk) is a newly appeared financial risk management tool in recent years, which is a method that uses statistic thought to evaluate the financial risk. In the past several years, VaR has been more and more valuable with the extensive application, becoming a kind of technique to measure market risk in common use. This thesis lays emphasis on quantitative analyzing of Interest Spread Risk, policy pricing, policy design and present value of policy profits by VaR technique. In the empirical analysis, this study uses VaR model to analyze initial premium and control IRR of China's life insurance.At first this thesis points out that it is necessary to enhance the management of the IRR of China's life insurance by analyzing the IRR of China's life insurance industry. Then the thesis introduces basic methods of life insurance pricing and VaR model. The fourth section is the core of this thesis. Writer demonstrates the procedure of policy pricing by VaR technique. This thesis figures out VaR of profit objectives by Monte Carlo Simulation, which uses jump-diffusion stochastic model with the mean reverting process to simulate interest rate movement. At last, the thesis discusses some measures of guardingagainst the IRR of life insurance pricing. There are three main measures which are based upon characters of life insurance products in the thesis: the policy with unfixed credit interest rate, calculating risk cost of Interest Spread Risk in policy pricing, renovating life insurance products. This thesis pays more attention on theoretical study in method and technology. Writer hopes the thesis can dedicate to life insurance practical operation in our country.