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Modeling Life Insurance Guarantees

Hansson, Tobias (2016) FMS820
Mathematical Statistics
Abstract
Insurance contracts with guarantees have been issued by insurance
companies for a long time. For example, in the 1970s and the 1980s,
when the interest rate in the UK was as high as 15-20%, these contracts
were issued with guaranteed rates of as high as 10%, thinking
the interest rate levels would stay around the same. However, the interest
rate decreased and, as of today, interest rate levels are around
and even below zero, which has led to insolvency problems for many
insurance companies. Currently, with the low interest rate environment,
guaranteed rates are mostly oered at a zero guaranteed rate,
but with a rising interest level in sight, these rates are likely to come
back into the market because of competitiveness reasons.... (More)
Insurance contracts with guarantees have been issued by insurance
companies for a long time. For example, in the 1970s and the 1980s,
when the interest rate in the UK was as high as 15-20%, these contracts
were issued with guaranteed rates of as high as 10%, thinking
the interest rate levels would stay around the same. However, the interest
rate decreased and, as of today, interest rate levels are around
and even below zero, which has led to insolvency problems for many
insurance companies. Currently, with the low interest rate environment,
guaranteed rates are mostly oered at a zero guaranteed rate,
but with a rising interest level in sight, these rates are likely to come
back into the market because of competitiveness reasons. To avoid
such insolvency issues again, every risk in the contracts has to be
identied, and we have focused on the risk in the interest rate process.
This thesis highlights the risk involving the parameter estimation
of the interest rate process. It also demonstrates the large price

uctuations that occur from dierent types of yield curves and how
it diers for dierent maturities. In these contracts, put options are
embedded and a Fourier-Gauss-Laguerre model is used to price the
options and we include both stochastic volatility and stochastic interest
rate.
Previous studies have shown that the parameter risk involving the
mortality estimation cannot be ignored and the results in this thesis
concludes that the uncertainty involved in the parameter estimation
of the interest rate process canont be ignored either. (Less)
Please use this url to cite or link to this publication:
author
Hansson, Tobias
supervisor
organization
course
FMS820
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
8878522
date added to LUP
2016-06-08 08:34:40
date last changed
2016-06-09 14:44:29
@misc{8878522,
  abstract     = {Insurance contracts with guarantees have been issued by insurance
companies for a long time. For example, in the 1970s and the 1980s,
when the interest rate in the UK was as high as 15-20%, these contracts
were issued with guaranteed rates of as high as 10%, thinking
the interest rate levels would stay around the same. However, the interest
rate decreased and, as of today, interest rate levels are around
and even below zero, which has led to insolvency problems for many
insurance companies. Currently, with the low interest rate environment,
guaranteed rates are mostly oered at a zero guaranteed rate,
but with a rising interest level in sight, these rates are likely to come
back into the market because of competitiveness reasons. To avoid
such insolvency issues again, every risk in the contracts has to be
identied, and we have focused on the risk in the interest rate process.
This thesis highlights the risk involving the parameter estimation
of the interest rate process. It also demonstrates the large price

uctuations that occur from dierent types of yield curves and how
it diers for dierent maturities. In these contracts, put options are
embedded and a Fourier-Gauss-Laguerre model is used to price the
options and we include both stochastic volatility and stochastic interest
rate.
Previous studies have shown that the parameter risk involving the
mortality estimation cannot be ignored and the results in this thesis
concludes that the uncertainty involved in the parameter estimation
of the interest rate process canont be ignored either.},
  author       = {Hansson, Tobias},
  language     = {eng},
  note         = {Student Paper},
  title        = {Modeling Life Insurance Guarantees},
  year         = {2016},
}