Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100263
Authors: 
Berdin, Elia
Gründl, Helmut
Year of Publication: 
2014
Series/Report no.: 
SAFE Working Paper Series 65
Abstract: 
Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess and quantify the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers' balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, leading to relatively high cumulative probability of default for less capitalized companies.
Subjects: 
Life Insurers
Interest Rate Guarantees
Risk Assessment
Solvency II
JEL: 
G22
G23
G17
E58
Document Type: 
Working Paper

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