Pricing Model Of Participanting Life Insurance In A Stochastic Interest Rate Environment

In the traditional pricing approach of participating insurance, Black-Scholes model is generally used and it assumes that the risk-free interest rate is fixed or constant. But in the increasingly volatile financial environment and competitive insurance market, the interest rate will change with the economic environment and relevant laws and regulations. With the advance of Chinese interest rate market, the interest rate of participating insurance has become the central issue. Depicting the stochastic property during the price of participating insurance product has important realistic meaning and practical value.At first, this paper describes participating insurance pricing theory briefly, then introduces surrender option and special insurance reserves to reflect the characteristics of the policy contract clearly. Secondly, at the base of constant volatility in a stochastic environment, we build the participating insurance pricing model. By GMM method and bank lending data, we estimate the parameters of interest suiting for this article. We use Least Squares Monte Carlo method to finish the numerical simulation, and compare the simulation results with real products. The result shows that our model is more effective than the fixed interest model.From the results above, we also find that the asset portfolio volatility and interest volatility influence the contract value most. So we study the participating insurance pricing model when interest volatility varies with the time. We also use GMM method and Least Squares Monte Carlo method to get numerical solution. Comparing with the real products, we consider the model is valid. Further more, we compare these two models in stochastic environment, they have many similarities and differences.Through the establishment of participating insurance pricing model under stochastic interest rate, we find that asset portfolio volatility and interest rate volatility have a great impact on the value of insurance policy. If we use a fixed rate to price participating insurance, we will underestimate the value of funds and it may bring risks of reserves and payment. On the basis of the conclusions of this study, we give suggestions to policy holders, insurance companies and regulators. We hope this study can provide theoretical references to risk management of participating insurance. According to it, insurance companies and regulators can establish mechanisms to prevent the damage caused by volatilities in interest rates and guarantee the stable development of life insurance industry.