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Modelling life insurance new business risk

Apere, P. O. (2005). Modelling life insurance new business risk. (Unpublished Doctoral thesis, City, University of London)


The development of new business plans is a very important responsibility affecting an ongoing life insurance company’s profitability and solvency, and yet there is little life insurance literature in respect of the allocation of free assets to write new business. The uncertainty in fulfilling a company’s future new business plans requires asset/liability models for both the market and the company to determine the effects of new business (strain) risk on a life insurance company in a competitive and stochastic environment. In this investigation, the decision concerning the allocation of free assets to write new business is taken as a proxy for the new business plan. Our research is based on non-profit non-linked insurance products.

The new business strategies (formulated with different pricing policies) and the market new business model (the relationship between the new business demanded and the price of the product / the policyholders’ real income provide the framework for the simulated results. The market results form the base in modelling the company. The investigation makes a clear distinction between the quantity of new business demanded and that which is actually written.

We note the dominance of adequate free assets available and allocated to write new business in the new business plans in the course of the research. However, the sensitivity of the new business models can only be known if a company has sufficient free capital to write the quantity of new business demanded being generated by the models. Therefore, in producing a particular level of (relative) insolvency risk, a company’s free assets allocation decision needs to be taken alongside the choice of new business and investment strategies. The results show that a company requires a relatively low constant proportion of free assets to finance new business over the long term.

It is shown that, in managing the new business (strain) risk with financial reinsurance including quota share basis of original terms reinsurance, a company can increase the proportion of free assets allocated to write new business only if the level of financing provided covers adequately the expenses related to the reinsured business.

As the research is based on non-profit non-linked products and on the assumption that there will be no future injection of capital to write new business over the projection year, we have suggested further research to consider the impact of future injection of capital by the shareholders and bonus distribution policy on the new business plans.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HF Commerce
Departments: Bayes Business School > Actuarial Science & Insurance > Statistical Research Reports
Bayes Business School > Bayes Business School Doctoral Theses
Doctoral Theses
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