Asset and liability management for life insurers: effective duration and effective convexity analysis and simulation optimization

• Main Authors: Chan, Fang-Shu, 詹芳書
• Other Authors: Tsai, Cheng Hsien
• Format: Others
• Language: en_US
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/57408441543674402127

博士 === 國立政治大學 === 風險管理與保險研究所 === 98 === In the first part of this doctoral dissertation, we focus on a proper measurement on interest rate risk of life insurer’s liabilities, policy reserves, by incorporating the general effective duration and effective convexity measures. Tsai (2009) identified a term structure of the effective durations of life insurance reserves. We find that his results are not general. When the long-run mean of interest rates is higher than the policy crediting rate and the surrender rate is sensitive to the spread, the term structure would exhibit an opposite pattern to the one in Tsai (2009). We further find that the effective convexities might be negative and the term structure of the effective convexities exhibits no general pattern. The irregularities originate from negative effective convexities result from the relationship between mean reserves and initial short rate for different years to maturity. Our results can help life insurers to implement more accurate asset-liability management. In the second part, we analyze asset allocation and leverage strategies for a life insurer selling traditional insurance products by using a simulation optimization method. We assume that an insurer invests equity capital (from its shareholders) and premiums it receives from policyholders by choosing a portfolio intended to maximize the annual return of equity minus the penalty of insolvencies and risks. We regard the leverage as an internal factor in asset allocation. Based on these assumptions, we get a promising multiple-periods asset allocation and leverage, besides analyzing how leverage affects asset allocation strategies.