Cash Flow Techniques for Asset Liability Management in Life Insurance

Specialeforsvar ved Jesper Strodl

Titel: Cash Flow Techniques for Asset Liability Management in Life Insurance

Abstract:  Solvency II requires one to use methods that are proportional to the complexity of the underlying contracts. For a life insurance company with participating policies the complexity is high and simulation seems like the right method of choice, but because of the complexity the computational power required for each simulation is demanding. In this thesis we present new theory, where we do not condition on the state of the in-sured at future time points in order to calculate the liabilities. Our main result is an explicit solution to the expected future technical liability when the insured has both the free policy - and the surrender option. The framework is studied within hierarchical Markov models to further look for performance by using the closed-form solutions of the transition proba-bilities. We derive new formulations for the market value cash flow that only need to be partially recalculated if intensities of the policyholder options changes. We discuss the idea of aggregating policyholders together, the limitations of the cash flow formulations and flexibility of the framework in a numerical example by gradually increasing the complexity. In the example we consider profit sharing, stochastic returns, additional benefits and surrender intensities dependent on the interest. 

Vejledere:  Jesper Lund Pedersen, Kim Aguirre Nolsøe, Keylane
Censor:      Jesper Olesen, Danica Pension