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A Study on Profit Analysis of Variable Life Insurance by Nested Stochastic Modeling

  • Journal of Insurance and Finance
  • 2014, 25(2), pp.111-137
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Shim, Hyunoo 1

1R&A Consulting

Accredited

ABSTRACT

For variable life insurance with GMXB(Guaranteed Minimum Benefit), the reserves for GMXB as a component of profit analysis are evaluated using stochastic scenario models, but the profit analysis as a whole is still performed via deterministic modeling methodologies. In this study, we recognize limitation of the above one-step methodology where stochastic modeling is applied only to reserves for GMXB; therefore, we extend it and develop principle-based nested stochastic modeling and then adapt it to profit analysis of variable life insurance. The detailed analysis reveals that the nested stochastic modeling eliminates the arbitrariness of best estimate assumptions arising from deterministic models and that the probability distribution of profit is asymmetric. Also, we show that the error in profit margin estimation can be reduced by fully-recalculating nested stochastic modeling, which recalculates the reserves for GMDB with new current market information loaded. The recalculation period of one year is found to be sufficient for the purpose of profit analysis of variable insurance.

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