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Excerpt:
Interest rates cycle over long periods of time. The journey tends to be unpredictable, full of
unexpected twists and turns. This project focuses on the impact of interest rate volatility on life
insurance products. As usual, it brought up more questions than it answered. It points out the
importance of stress testing for a specific block of business and the risk of relying on industry
rules of thumb. Understanding the nuances of models could make the difference between safe
navigation of a stressed environment and a default. Proactive and resilient practices should
increase the odds of success.
Hyman Minsky had it right—stability leads to instability. We live in an era where monetary
policies of central banks steer free markets in an effort to soften the business cycle. Rates have
been low for over 20 years in Japan, reshaping the global economy.The primary goal of this paper is to explore rising interest rates, but that is not possible without
considering that some rates could stabilize at low levels or even decrease. Following this path,
the paper will look at implications of interest rate changes for the life insurance industry, current
stress testing practices, and how a risk manager can proactively prepare for an uncertain future.
A paper published in 2014 focused on why rates could stay low, and some aspects of this paper
are similar (e.g., description of insurance products). This paper also uses a sample model office
to help practitioners look at their own exposures. It includes typical interest-sensitive insurance
products and how they might perform across various scenarios, as well as a survey to establish
current practices for how insurers are testing interest rate risk currently.
Author(s): Max Rudolph, Randy Jorgensen, Karen Rudolph
Publication Date: July 2015
Publication Site: SOA Research Institute