Interest-Rate Risk Control For China’s Life Insurers

Due to economic globalization, China’s financial market is maturing, market mechanism is reformed, interest rates and exchange rates are market-oriented. All these changes intensify the challenges and faced by China’s life-insurance industry. On the one hand, the fierce competition from foreign insurance institutions, which have an advanced business philosophy and abundant management experience; On the other hand, market-oriented interest rate market and financial risks easily transferring between countries challenge the ability of Chinese life-insurance company’s risk management.Life-insurance industry plays a pivotal role in the society, being a stabilizer of economic machine working effectively. China’s life insurance industry has made considerable progress in the past20years. The growth rate of annual premium is more than50%, much higher than one of GDP in the same year. Fierce changes in interest rate bring great challenges to life insurance companies. According to Goldman Sachs’ report, China Life, Ping An, the Pacific, three major life insurance company in China, have a potential negative interest rate spread about 320to760billion. Negative interest rate spread is harmful to the stable development of China’s life insurance industry. A lot of life-insurance companies are bankrupt owing to negative interest rate spread. Furthermore, since the1990s, the life insurance companies in developed countries launch innovative product, such as universal life insurance and Investment linked insurance etc. These policies are interest rate sensitive, which increases the difficulty of interest rate risk management. Therefore, the issue studied in this paper is particularly important.Firstly, we study the mechanism of the interest rate risk and measure the interest rate risk using quantitative methods, under the framework of Asset and Liability Management. Secondly, we analyze China-Life’s product,"Fu Lu Zun Xiang", to calculate the ED, ED and Diversity via Monte Carlo method. Thirdly, I construct the immunization using bond portfolio for this product. We can get a conclusion that immunization considering Diversity has a better performance than without ordinary immunization strategy.