On the distribution of life insurance reserves in a stochastic mortality interest rate and surrender rate enviroment

Abstract

The risk management of reserves is critical to the solvency of a life insurance company. The literature has shown that the right to surrender the life insurance policy for the cash value could be an important determinant to the risk of reserves. In this paper, we use simulation to incorporate the risk of early surrender into the estimation for the reserve distribution. We find that the mortality risk is immaterial. Stochastic interest rates as well as uncertain parameters in the interest rate model significantly increase the mean and the risk of reserves. On the other hand, early surrender reduces the expected value and the risk of reserves due to the surrender charge and the surrenders happened in the low interest rate era. Early surrender therefore could benefit the life insurance company.