1、 外文文献 The Pricing for Interest Sensitive Products of Life Insurance Firms James C. Hao Associate Professor， Department of Insurance， Tamkang University E-mail： cjhaomail.tku.edu.tw Received February 10， 2011； revised April 15， 2011； accepted April 26， 2011 The major purpose of this paper is to const
2、ruct interest rate risk models for interest sensitive products issued by life insurance firms in Taiwan. With interest declines in late 1990s， single paid interest sensitive annuity takes up about 20% of new policy premiums in Taiwan； This implies its risk and profitability become critical to insure
3、rs financial health. The paper constructs the Black-Derman-Toy model combining with optional-adjusted spread analysis model to price the spread on asset required to yield to make such products break even， with further extension to measure the impact of interest shock on asset liability management. W
4、e choose two different crediting strategy products to illustrate the option value of the insurance firms- the option to reset rates based on the path of interest rates and the expenses charges as well as the option of policyholders-the option to surrender policy if not satisfied with crediting rate.
5、 With our implement Table models， insurance firm will have capacity to quantify its risk exposure and source of profitability as well as to seek an optimal strategy balancing sale volume and aggressiveness of crediting policy. Interest rate risk is an important concern for life insurance firms. Insu
6、rers issue debt instruments for which the amount and timings of benefits payment are unknown at time of policy issuance and invest the premiums to maximize the return. The asset cash flow is composed of investment income and principal repayments while the liability cash flow in any future time is de
7、fined as the sum of the policy claims， policy surrenders and expenses minus the premium income expected to occur in that time period. When interest rates fall as the net cash flows are positive， the net flows will have to be reinvested at rates lower than the initial rates. The reinvestment risk eme
8、rges. On the other hand， negative net cash flows mean shortages of cash needed to meet liability obligations. A cash shortage requires the liquidation of assets or borrowing. If interest rates rise when the net cash flows are negative， capital losses can occur as a result of liquidation of bonds and
9、 other fixed-income securities whose values have fallen. And the price risk occurs. Taiwan insurance companies are exposed largely to interest risk even though the popular products change over time. Prior to 1990， market was featured with fixed interest rate products which guarantee 20 or more years
10、 of fixed return to policyholders. With interest starts to decline in late 1990s， Taiwan insurers realize that high fixed interest products are too costly to issue but low fixed-interest rate products wont be attractive to potential buyers. With the sale pressure， insurance companies start to issue
11、unit-linked products as well as interest sensitive products to attract buyers. Single paid deferred annuities (SPDA) which belongs to interest sensitive family quickly takes up almost 20% of new premiums in the market and therefore its risk exposure becomes vital to insurers insolvency. With single
12、premium payment， SPDA policyholders earn interest at the company-declared annual interest rate which is guaranteed for one year at a time. Before the annuity commencement date， policyholders can with-draw all of the annuity value or part of it. With the above features SPDA involves two options. One
13、option is in the policy holders hands， the option to surrender the con-tract early. As interest rates rise， SPDA owners tend to surrender and reinvest in higher yielding investments which is similar to the mortgage borrowers behavior. The other option is in the insurance companys hands， the right to
14、 reset interest rates. The reset policy is function of market competitiveness ， insurers investment performance and regulation limitations. Santomero and Bebbel (1997) state that insurers have a sense of urgency to apply the tools of asset/liability management to manage interest rate risk. The tradi
15、tional approach to interest rate risk management and valuation， namely standard immunization method， is based on the assumption that the yield curve is flat and interest rates change in a parallel and deterministic manner， which implies that asset and liability cash flows are independent of interest
16、 rate fluctuations. This condition and approach certainly does not hold for assets such as callable bonds and interest sensitive liabilities such as SPDA. This paper applies arbitrage free interest rate and option-adjusted spread analysis model to demonstrate how these models are constructed to meas
17、ure the risks and to quantify emerging profits or losses by source for interest sensitive life products. Conclusions With interest starts to decline in late 1990s， Taiwan insurers start to issue interest sensitive products to replace the traditional fixed interest life products. Single paid deferred
18、 annuities (SPDA) which belongs to interest sensitive family quickly takes up about 20% of new premiums and becomes dominant product in the market. Due to its vital impact on life insurers financial status but little literature devoted to risk and profit identification， this paper develops BDT model
19、 and optional-adjusted spread analysis model to demonstrate risk measurement procedures and analysis results， with further extension to measure the impact of interest shock on asset liability management of SPDA. As shown in our model， the RSA for aggressive crediting strategy requires 144bp while mo
20、re conservative crediting strategy only requires 37bp and effective duration of both SPDA approximates 1.This implies aggressive and conservative products should yield at least 144bp and 37bp over Treasuries respectively， on a risk option-adjusted basis to break even， and the effective duration of a
21、sset dedicated to such products approximates 1.The analysis results convey two facts. First， the lower RSA is evidence of the value of the insurance firms option- the option to reset rates based on the path of interest rates and the prevailing surrender charge Second， Challenge of managing interest risk of such interest sensitive products is to dynamically balance the interest income and
