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Currency hedge and fair premiums in Life Insurance Guaranty Schemes
Foreign exchange swap
|Issue Date: ||2019-08-07 16:15:00 (UTC+8)|
Due to the low interest rate environment, Taiwan life insurance companies have to increase investments in offshore assets to meet the claim obligations from the past which commit policyholders to higher rates. As a result, insurance companies are facing huge foreign exchange risks. The recent currency hedge costs have
dramatically increased due to the fluctuation of interest rate spreads between the U.S. and Taiwan. According to Financial Supervisory Commission, exchange loss for life
insurance in 2018 is 230.9 billion, about 2.5 times of that year’s EBIT(84.2 billion), which shows foreign exchange risks have become a major issue for insurance firms in Taiwan.
This paper studies the fair premiums in life insurance guaranty schemes. We value such premiums by stochastic processes methods and consider foreign bond investments and foreign exchange swaps in our model. Our research provides：(1) Focus on the influences from foreign investments and hedge strategies. (2) Calculate the foreign exchange risks in life insurance. (3) Analyze interests of both policyholders and shareholders in various scenarios.
We find that： (1) As the hedge ratio goes up, the fair premiums will drop. (2) As the volatility of the exchange rate increases, the premiums will also increase. (3) The
foreign exchange risks affect premiums more than the interest rate risks do if the hedge ratio is low, and vice versa. (4) If we aim to minimize the premiums, the
optimizing foreign investments ratio won’t be 0 and will increase with the hedge ratio. (5) Under above scenarios, the shareholder options and insurance guaranty premiums
share the same direction movements, which indicates the conflict between shareholders and policyholders.
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|Source URI: ||http://thesis.lib.nccu.edu.tw/record/#G0105358026|
|Data Type: ||thesis|
|Appears in Collections:||[風險管理與保險學系 ] 學位論文|
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