Stochastic solvency testing methods have existed for more than 20 years, yet there has been little research conducted in this area, particularly in Australia. This is for a number of reasons, the most pertinent of which being the lack of computing capabilities available in the past to implement more sophisticated techniques. However, recent advances in computing have made stochastic solvency testing possible in practice and have resulted in a trend towards this being done in advanced studies.
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The purpose of this thesis is to develop a realistic solvency testing model in a form that can be implemented by Australian Life Insurers, in anticipation that the Australian insurance regulator, APRA, will ultimately follow the world trend and require stochastic solvency testing to be carried out in Australia. The model is constructed from three interconnected stochastic sub-models used to describe the economic environment and the mortality and lapsation experience of the portfolio of policies under consideration. Australian economic and Life Insurance data is used to fit a number of possible sub-models, such as generalised linear models, over-dispersion models and asset models, and the ``best'' model is selected in each case. The selected models are a modified CAS/SOA economic sub-model; either a Poisson or negative binomial (NB1) distribution (depending on the policy type considered) as the mortality sub-model; and a normal-Poisson lapsation sub-model.
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Based on tests carried out using this model, it is demonstrated that, for portfolios of level and yearly-renewable term insurance business, the current deterministic solvency capital requirements provide little protection against insolvency. In fact, for the test portfolios of term insurance policies considered, the deterministic capital requirements have levels of sufficiency of less than 2% (on a Value at Risk basis) when compared to the change in capital distribution over a three year time horizon. This is of concern, as yearly-renewable term insurance comprises a significant volume of Life Insurance business in Australia, with there being over 426,000 yearly-renewable term insurance policies on the books of Australian Life Insurers in 1999 and more business expected since then.
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A sensitivity analysis shows that the results of the stochastic asset requirement calculations are sensitive to the choice of sub-model used to forecast economic variables and to the choice of formulae used to describe the mean mortality and lapsation rates. The implication of this is that, if APRA were to require Life Insurers to calculate their solvency capital requirements on a stochastic basis, some guidance would need to be provided regarding the components of the solvency testing model used. The model is not, however, sensitive to whether an allowance is made for mortality or lapsation rate over-dispersion, nor to whether dependency relationships between mortality rates, lapsation rates and the economy are allowed for. Thus, over-dispersion and dependency relationships between the sub-models can be ignored in a stochastic solvency testing model without significantly impacting the calculated solvency requirements.
| Identifer | oai:union.ndltd.org:ADTP/208584 |
| Date | January 2009 |
| Creators | Hayes, Genevieve Katherine, genevieve.hayes@anu.edu.au |
| Publisher | The Australian National University. School of Finance and Applied Statistics |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | http://www.anu.edu.au/legal/copyrit.html), Copyright Genevieve Katherine Hayes |
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