A Typical Method To Determine Solvency Margin For Traditional Life Insurance

In the life insurance industry, solvency, which stands for the capacity of a life insurance company to fulfill its due obligations, is a key point for risk control. The most commonly used indicator to assess the solvency is the solvency margin, it is not only an intuitive reflection of a company’s debt servicing-capacity, but also a reference for the comparison of financial security among different enterprises. The solvency margin has significant impacts on the risk monitoring system of a country. The core idea which underlies the definition of solvency margin is that an insurance company should gain adequate funding to cope with all kinds of risks at any time, and the calculation of it generally involves a comprehensive appraisal of all the risk exposures the company is facing.In this paper, a solvency margin evaluation model is constructed based on the usage of a scale-free, regularly settled fund and the inclusion of mortality risk and surrender risk. The article shows that the existence of the solution of the model could be proved under a certain set of conditions, sets forth the steps of solvency margin calculation and expands the model to a certain extent. Unlike most accomplished studies on solvency margin which integrate various types of risks by divide and conquer approach, this paper provides a more sophisticated and practical way. At last this paper performs numerical analysis to apply the model to several typical types of life insurance business. By comparing results under various products and risks, the model’s ability of risk identification and integration together with the solution’s sensibility for different policy and risk factors are clearly illustrated.