2016, Vol.27, No.1

Journal of Insurance and Finance 2023 KCI Impact Factor : 0.59

pISSN : 2384-3209
https://journal.kci.go.kr/kiri

In this paper, we intend to project the future Korean mortality rates, and analyze the effect of mortality improvement on the life expectancies and the actuarial present values of life insurances and life annuities. Under the Poisson log-bilinear model, we estimate the parameters for the Korean males by using the hierarchical Bayesian methodology proposed by Czado et al.(2005). For comparison purpose, we provide the estimation results based on the singular value decomposition and the maximum likelihood estimation. Our results show that the parameter estimates based on three different estimation methods do not exhibit a large difference between each other, but the traditional estimation methods underestimate the prediction interval. We expect that the Bayesian estimation method not only can provide a solution to this underestimation problem, but could be very useful to evaluate insurers’ liabilities in the future.

If IFRS4 Phase II is adopted, various options and guarantees embedded in insurance contracts should be valued in the light of policyholder behavior. In this paper, the research on the valuation of interest rate guarantees was performed focusing on guaranteed minimum interest benefit(GMIB) and guaranteed minimum surrender benefit(GMSB) embedded in interest sensitive whole life products with dynamic lapse rate models. The research shows that higher guaranteed minimum interest rates for GMIB and pricing interest rates for GMSB result in higher values of GMIB and GMSB, respectively. When applying dynamic lapse rates, GMIB and GMSB are lower than those with basic lapse rates. This is due to the dynamic lapse assumption that lapse rates decrease when guaranteed account value is greater than actual account value. If dynamic lapse rates decrease, GMIB and GMSB decrease, since the financial burden will be deferred to the future period. The sensitivity analysis for crediting interest rates shows that lower crediting interest rates result in higher values of GMIB and GMSB. In addition, lower mortality rates lead to higher GMIB and GMSB. The analysis results imply that GMIB and GMSB for the existing old products with high guaranteed minimum interest rates and pricing interest rates could be financially burdensome to insurers in a low interest rate environment and under IFRS4 Phase Ⅱ.

In this article, we model and discuss determination of optimal minimum guaranteed rate of return, as well as optimal investment and reinsurance strategies of universal life insurance by minimizing both the investment risk and the risk of obtaining guaranteed return, with the constraint of surplus larger than a prescribed constant. We also discuss the application of dynamic programming in finding dynamic solutions to these optimization problems. We analyse the affect of the change of the risk-free interest rate, the age of insured, the cost of reinsurance, and mortality on optimal solutions. Our results indicate that changes in the insured age, in the risk-free interest rate (when risk-free interest rate takes high value), and of mortality will not materially affect the optimal value of minimum guaranteed return rate, investment and reinsurance strategies except for the situation when mortality decreases. However, changing these parameters will affect the sum of the volatilities of investment and minimum guaranteed return rate and the surplus of the insurer. The results also indicate that the optimal and sub-optimal minimum guarantee return rates are very low when risk-free interest rate is very low ().