| Fluctuation in interest rate provides one of the primary risks to the insurance companies, especially to life insurers. Even if the rate changes a little, the fluctuation of the reserves may be tremendous.Interest rate is often assumed to be a fixed value in traditional life insurance, whether it is for long term or short term, term products or endownment ones. The assumed value is stable throughout the policy period and is determined by the type of the insurance product and its policy duration, etc. This assumption does not reflect the fluctuation and the trend of the actual interest rate, and may create discrepancy between the real value and the assumed value.Scenario Analysis is one of the most popular methods used in the evaluation of reserves. It is a process of analyzing possible future events by considering various possible scenarios. This analysis provides improved decisions by allowing more complete consideration of outcomes and their implications.The scenario analysis has two different assumptions on the interest rate. The first one assumes a single interest rate at every possible scenario. It is simple to calculate, and we can receive sensitivity analysis results when we need. The second one assumes varied interest rate at different periods of a scenario, that is to say, it has different trend assumption. This assumption can provide a better approximation to the real value.The Monte Carlo Simulation method is an improvement over the Scenario Analysis method. It compensates the deficiencies in Scenario Analysis and is able to retrieve more insights than we are able to get otherwise.In this paper, we implemented the Monte Carlo simulation method to analyze the reserves. We have improved the reserves valuation method with several interest models. It uses a new mathematical method to analyze the reserves of the risk caused by the fluctuations in interest rate, and enables a new way to the risk managements of interest rates in insurance companies. |
PDF Full Text Request