The project aimed at analyzing the solvency of life insurance companies that, in particular, face both interest rate and longevity risk. We based our analysis on models that are as close to reality as possible. This implied to depict the typical capital investment structure of life insurance companies in Europe. The interest structure process and the development of stock and real estate prices have been depicted stochastically. On the liability side of the balance sheet we modelled the structure of the existing business as well as the changes over time due to the expiration of contracts and new business. Based on stochastic simulations we calculated how the risks life insurers face alter with different interest rate scenarios and changes in longevity rates.
- The low interest rate environment causes relatively high default probabilities for life insurance companies depending on their financial situation. Interest rate risk is by far more important than longevity risk. Also, our results show that – if interest rates stay on a very low level – the profitability of the life insurance business will decrease substantially which has potentially further negative effects for private old-age provision.
- As we analyzed the low interest rate environment systematically, our results are of high importance to regulatory and supervisory authorities as well as for the insurance industry. On the one hand, our models allow regulatory and supervisory authorities to test policy interventions, on the other hand, they provide a tool for the insurance industry to analyze the consequences of different business strategies.
- Based on the models developed in this project, both EIOPA and the ECB have established similar models for the so called top-down stress tests, supported by the project team member Elia Berdin (see e.g. Berdin, Kok, Pancaro (2016) “A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers”).
This project was funded by:
|Elia Berdin, Helmut Gründl||The Effects of a Low Interest Rate Environment on Life Insurers|
The Geneva Papers on Risk and Insurance: Issues and Practice
|2015||Financial Intermediation||Life Insurers, Interest Rate Guarantees, Risk Assessment, Solvency II|
|65||Elia Berdin, Helmut Gründl||The Effects of a Low Interest Rate Environment on Life Insurers||2014||Financial Intermediation||Life Insurers, Interest Rate Guarantees, Risk Assessment, Solvency II|
|137||Elia Berdin, Christoffer Kok, Cosimo Pancaro||A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers||2016||Financial Intermediation||Financial Stability, Insurance, Interest Rate Risk, Stress Test|
|Helmut Gründl||Stellungnahme zum Entwurf eines Gesetzes zur Absicherung stabiler und fairer Leistungen für Lebensversicherte|
Policy Letter No. 29