The Study Of Traditional Life Insurance Pricing Under Single Factor Interest Rate Models

Along with the frequent fluctuation of Chinese market interest rate, assumed rate of interest have to adjust accordingly. If assumed interest rate is too high, life insurance will bear great loss, as a result of the unstable interest rate; yet, if too low, it will seriously impact on the sales of traditional life insurance policy. Naturally, with the development of China’s insurance industry at present, traditional premium income should grow faster than investments’. However, Chinese current situation is on the contrary. Recently, China Insurance Regulatory Commission release a notice about assumed interest rate of traditional life insurance(exposure draft), which explicitly express the decision of opening the assumed interest rate of traditional life insurance. Under this policy, structural adjustment will be promoted forward, traditional life insurance will be made further development, then the insurance industry will be recover its security function acceleratedly.Considering the situation of traditional life insurance products presently, this paper propose to replace fixed assumed interest rate with single factor interest rate models.In this paper we use single factor rate models to simulate fluctuation of market interest rate, and then employ them to price traditional life insurance. Firstly, the article use the general method of moments to estimate parameters in single factor interest rate models. After testing, we assess which one matches the market interest rate volatility best. Furthermore, under some assumed conditions, by using random interest rate which is produced by single factor interest rate, whole life insurance and endowment price will be evaluated. In comparison, we get the optimal single factor interest rate model. Traditional life insurance using single factor interest rate models not only considers change of interest rate, but also its price lower obviously. Finally, this paper analyses the current situation of traditional life insurance market, and gives some suggestions.