| Summary: | 碩士 === 國立政治大學 === 風險管理與保險研究所 === 105 === This article uses Monte Carlo simulation method to forecast the random walk process of Taiwan interest rate, US interest rate, and Taiwan US dollar exchange rate between next five years. The simulation base on three time series model：Vasecik, ARMA and VEC. Through the random walk process, this article aims to analyze the influence in asset, liability and equity by the change of interest rate and exchange rate.
In this paper, we find that the Vasicek interest rate model has a more stable stochastic process than the VEC model, which because of the effect by mean reversion. On the other hand, because the VEC exchange rate model takes both long-term and short-term impact in concern, it has a more robust stochastic process than the ARMA model.
Through the simulation results of the liabilities, we find that when the interest rate fell, the reserve value of insurance policy will rise faster, which makes life insurance companies face more severe capital requirements in the low interest rate environment. Besides, we also find that the interest rate term structure in the Vasicek Bond Pricing Model displays negative slopes with concave upward, which means the value of short-term interest rate higher than the value of long-term interest rate. In this situation, the reserve value of insurance policy will become much higher than the value original priced.
In the long-term low interest rate environment, the impact of interest rate risk has more effect in the long-term insurance policy. This paper suggests that when pricing the costs of insurance policy, we should not only use one interest rate as the full term discount factor. The better way is to discount with the interest rate term structure.
Overall, in this paper, the asset allocation strategy, which focus on Taiwan commercial bonds, has both better performances in value at risk and better ability to covert risk into revenue in the short term. On the other hand, the asset allocation strategy, which focus on US commercial bonds, has better ability to covert risk into revenue in the long run. When conducting overseas asset allocation, we suggest that life insurance companies should carefully consider interest rate risk and exchange rate risk.
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