Interest Rate and Longevity Risks in Life Insurance
Summary
The document discusses risks faced by life insurers, focusing on interest rates and longevity. It explains that insurers may promise benefits linked to returns or prevailing rates while holding assets such as bonds. When market rates rise, existing lower-yielding bonds can make it harder for the insurer’s portfolio to earn the returns needed to meet those obligations. It also identifies longevity risk in life policies that pay benefits when policyholders reach a specified age: if people live longer than assumed, claims may persist longer than expected.
The answer notes that catastrophe events can also create concentrated mortality losses when many insured people are affected at once. These points are qualitative illustrations rather than a full account of solvency calculations, internal models, risk limits, or the comparison of Solvency II and MaRisk, which the original question also raised. The discussion cautions that life insurance products and regulation differ across countries, so the examples may not generalize to every market or contract design.
Key ideas
- Rising market rates can leave insurers holding existing bonds with yields below current rates.
- Longevity risk arises when policyholders live longer than the assumptions used to price or reserve for benefits.
- Catastrophes can cause concentrated losses when they affect many insured people at once.
- The relevance of these risks depends on policy design and local regulation.
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Full text
# Risk management insurance (Solvency II / MaRisk) # Risk management insurance (Solvency II / MaRisk) I have a few different questions on topics involving an doing risk management in life insurance. If someone could shed some light on these issues, I would be very thankful. a) How does an actuary do the solvability calculations as imposed by Solvency II in practice? What does this look like? b) What does an internal model in life insurance look like? c) What does the implementation of risk limit systems look like? d) What are the most important risks that life insurance companies face? Obviously, the fluctuation of interest rates is one such risk. What are others? e) Why is it worse for a life insurance company if the market's interest rate rises? If the interest rate grows, then the bonds are worth less. But if the interest rate drops, then the company's investments don't generate as much revenue. So why is it worse if the interest rates rise? I would be very grateful for some resources, where these subjects are explained, in an easy to understand language. A few other questions on different topics: - For which casualty lines are heavy tail distributions used, except fire and liability (industry)? - Similarly, where are light tail distributions usually used? - Is ruin theory used in practice? How strong are ruin probabilities dependent on the distribution class used in calculations? - What are the similarities and differences between Solvency II and MaRisk (VA)? - How do you determine the rating of a specific financial position if you know its VaR? As I said, if you can contribute in any way, so that I can get some answers to these questions, please do so. Your input is priceless for me. Thank you very much for your time! ## Answer by user1656774 (score 4) https://quant.stackexchange.com/a/4702 Well, 2 answers I knew right away :-) d) That depends on what is insured. In classical life insurance (person gets sum insured in case of death only) one risk would be large catastrophes with many insured people involved (like 9/11, for example). A "larger" risk is, as you said, change in interest rate, though. In Germany (I don't know about other countries) there are mixed life insurance treaties where you get also money when reaching a certain age. For those contracts, longevity is a huge risk. That is, if people live longer in general, for example because of better medical care and therefore old/false probabilities are used for calculation. e) I think it is because the market interest rate is used as a benchmark in the portfolio management of the insurance company. On all the money you have from people insured, you have to earn (and pay them or write as benefit to their contract) the market interest rate. When it rises, but you have too many bonds etc. at a lower interest rate it is difficult to reach the rising interest rate on your overall assets / portfolio. Take care, regulations on life insurance are different in different countries...
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.