Analysis Of Interest Rate Sensitivity To Our Country’s Participating Life Insurance Surrender Rate

Although it has been only 15 years since the appearance of the first participating life insurance during the 20th century, it developed extremely rapidly. The premium of the participating life insurance has exceeded 70% of the life insurance market. So it is visible that the participating life insurance can affect the company’s overall business conditions deeply. However, the surrender issues of participating life insurance products have occurred because of the policy holders’lack of the knowledge of participating life insurance products and the ever-changing macro-economic factors. Of the factors of the surrender of participating life insurance, the interest rate is one of the main factors can not be ignored, especially during the advanced process of market interest rates in recent years. Because participating life insurance lasts a long period and has a profitable characteristic, so it is always sensitive to interest rate, if the interest rate fluctuates larger, the policyholders can’t get the expected benefits, they will tend to surrender.In 2013,2014, for the people’s bank of China adjusted the financial institutions’ lending and deposit rates twice, the country’s interest rate marketization processed, the marketization of the interest rate must promote the liberalization of the life insurance’s pricing rates, leading to the marketization of the life insurance’s fee interest. Life insurance companies should have a forward-thinking and recognize this as early as possible, they should prevent the interest rate risk during the design and sale of the participating life insurance to reduce surrender problems. While before doing this, we need to know the sensitivity of the participating life insurance’s surrender rate to the interest rate, only by understanding this can we propose appropriate measures to effectively reduce participating life insurance’s surrender.In this paper, the basic theories of participating life insurance are introduced. One of the most important features of participating life insurance is that it not only has the function of protection, but also has the function of income, which is mainly reflected in the dividend distribution. Life insurance companies will divide their proceeds with policyholders if they operated in good condition, and so because of the existence of dividend bonus does participating life insurance faces the risk of interest rate. In the next, this paper describes the surrender to the adverse effects of insurance companies and analyzes the factors that lead to the surrender:external factors, the life insurance industry factors, internal factors, and life insurance company policyholders factors. Among these factors, how the interest rate factors act on participating life insurance’s surrender is briefly analyzed.Before the empirical analysis, this paper introduces some of the insurance company’s current target rate and the surrender of several theoretical models about the surrender rate index, by comparing and analyzing, the least-squares Monte Carlo simulation method is selected, and how to found and solve the least-squares Monte Carlo simulation model is described in detail next.In the part of the empirical analysis, five different values of market interest rates are selected to analyze the participating insurance surrender rate’s sensitivity to interest rates’ changes by using the least squares Monte Carlo simulation method. The empirical results show that with the interest rate increasing, the peak of the surrender rate arrives ahead, but the maximum of the surrender rate becomes smaller, and the number of the policyholders exceeds 50% on the deadline for the different interest rates. So we believe that participating insurance’s surrender rate is not sensitive to changes in interest rates. However, although participating insurance can resist a part of the interest rate risk effectively, this is not enough to believe the changes in interest rates will not cause the surrender of the participating insurance. So in the following, a number of recommendations for Chinese life insurance companies are proposed.The innovation of this paper lies in using the least squares monte carlo simulation method to study the effects of interest rate changes on surrender rate of participating life insurance, by using this model, this paper solves the dilemma when there are not enough data to use. The deficiency of this article is that interest rate marketization in our country is in its infancy, it lacks real data to examine the empirical analysis, while the least squares monte carlo simulation can also get the real results by repeating a large amount times without using the real data, but the result can be only for reference, it can’t be tested. At the same time, there are many factors influencing the participating life insurance’s surrender rate, and the design of the actual participating life insurance policy terms are varied, these will also affect the participating life insurance’s surrender rate. What’s more, the research of this article is under the background of complete financial market and viable financial market hypothesis premise, it just stay at theory stage, how to study in more real financial market should be the next step to solve the problem.