Asset liability modeling for insurance and pensions (part 1)

Asset liability modeling for insurance and pensions (part 1)


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Speaker(s): Igawa Takayui (PricewaterhouseCoopers Aarata LLC)

Further information is presented in a detailed paper: Igawa_Paper.pdf

Many countries around the world confront problems related to longevity and investment difficulties caused by slowdown in economic growth and low interest rates. To make insurance companies and pension plans financially sustainable, methods of risk evaluation and risk sharing, which incorporate properly non-financial risks (such as mortality risk and surrender risk) and financial risks, are required. In this paper, the underlying asset liability model for insurance and pensions which consider correlations of mortality risk and financial risks based on the empirical analysis of the relation between the life expectancies and socio-economic factors are being developed. For the analysis,data provided by the Japanese government through public organization inquiries and statistics is used. According to the analysis using the structural equation model and the sparse modeling to investigate the heterogeneity of the Japanese prefectures' mortality, the unemployment rates clearly affect the life expectancy and the changes in the Japanese male mortality rates. In addition, referring to the results of prior studies, this study incorporates the correlation between surrender rates for insurance or lump-sum selection rates for pensions, and macroeconomic variables such as interest rates and unemployment rates to the model and expand it. Using these models, some cases are shown which illustrate how the liability evaluation changes by considering the correlation between mortality risk and financial risks. Furthermore, based on these results, key points are stated for risk management in insurance companies and risk sharing in pension plans.

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