The persistent low interest rate environment has a notable impact on the life insurance industry, and interest-sensitive life insurance (ISL) policies have become the major product sold in the Taiwan life insurance industry. The crediting interest rate of ISL is adjusted periodically to reflect the performance of its segregated funds, which is influenced by interest rate uncertainty. In this study, uncertainty from the capital market is modeled to examine ISL products through crediting interest rate declarations. As exchange rates become volatile, more so than interest rates, they expose companies to substantial currency mismatch when liabilities and assets are denominated in different currencies. Hence, segregated assets held by ISL fluctuate extensively and affect the insurer’s solvency.
In this paper, the simulation method is employed to measure the shortfall risk of insurers associated with risk-based capital requirements. Based on the numerical results of the simulations, the shortfall risks of ISL increase when the duration of the evaluation period increases. The results show that financial leverage and investment decisions are the major factors in controlling shortfall risk, and annual credited rates should be properly declared to reduce the risk capital.
