Liabilities Valuation Research On Universal Life Insurance

1990s was not a quiet period of the life insurance industry all over the world, The event of default collapse took place in insurance companies, whether in Europe, Japan or the United States. and the number of bankrupt companies was considerable. Some of the large life insurance companies with good reputation went bankrupt because of defaulted debt crisis. Painful lessons of the market made the International Accounting Standards Board, financial regulators and relevant researchers begin to re-examine the life insurance company’s accounting measurement attributes and the assessment methods of life insurance contract liabilities.As a new life insurance products, universal life insurance has the characteristics of flexible payment, adjustment of the insurance amount and establishing universal accounts for policy holders, each account use the rate of not less than the minimum guaranteed rate of return settlement rate to add the value Universal life insurance has had a place in the insurance market. These three characteristics of universal insurance is three embedded options that the insurance provide for the policy holder’s, Plus the right that all insurance products have, universal life insurance has four important embedded options. Because the guaranteed interest rate and the value of insurance products embedded option can-not be ignored, they are potential threatens for the life insurance company’s solvency.Traditional valuation techniques have been unable to resolve life insurance products’problems of guaranteed interest rate and embedded options valuation, Researchers began to explore assessment methods of life insurance contract’s liabilities fair value within the frame of modern financial theory. In this context, this paper attempts to establish a representative valuation model to assess the fair value of the universal life insurance contract’s liability and try to find specific methods to assess the fair value. Based on the risk-neutral pricing method and under the assumption that asset follows geometric Brownian motion and the risk-free rate of CIR, we derive calculated recurrence formula of the universal life insurance contract and establish the value valuation of China’s life insurance company’s universal insurance contract’s liability based on fair value. We use Monte Carlo simulation and least squares Monte Carlo simulations to solve fair value of European and American universal life insurance contract’s liability under a particular settlement rate smoothing mechanism.This paper can be divided into five parts:The first part is the introduction, It mainly introduces the research background and the significance, literature review and the research contents and methods. The second part is the theoretical analysis of the fair value of universal life insurance contract’s liability, highlighting the universal insurance and related theories of universal life insurance contract’s liability, which draws the conclusion that universal life insurance contract is essentially financial instruments. we should use fair value to measure it, and describe the fair value of liability connotation, the assessment model insurance contract’s liabilities are measured and the method and meaning of using fair valuel to assess universal life insurance contract’s liabilities; The third part introduces the valuation model of universal life insurance contract’s liability, including the valuation model’s setting, Monte Carlo simulation method for getting the numerical solutions simulation estimates and analysis of the results;. The fourth part introduces limitations of the assessment of universal life insurance contract liability’s fair value, and tries to find recommendations. The fifth part is the conclusion of this article, which briefly summarizes the valuation results.The simulation calculation shows us the follows. First, the asset volatility significantly influences the fair value of universal insurance contract’s liability, The greater the asset varies, the greater the fair value of the insurance contract’s liability. The amount and frequency of new capital that insurance company injects into the universal account can be significantly increased. Second, compared to the surrender option, the value of the lowest yield guaranteed option of the universal insurance contract is rather large, it is significantly influenced by the asset volatility and the smoothing coefficient; Third, the smoothing coefficient and assessment of the fair value of universal life insurance contract’s liability change in the opposite direction. The greater smoothing coefficient and the more conservative the distribution of the investment income, the smaller fund amount that insurance company injects into the universal account. At the same time, the smaller fair value of the contract’s liability.In the valuation model of universal insurance contract’s liability fair value, the paper introduces the CIR stochastic interest rate model, while the introduction of random processing method increases the complexity of the model. Due to the limitation of mathematical knowledge, the paper fails to value the relevant parameters, thus it remains to be further studied and improved in the future.