Department of Finance
Date of this Version
1995
Document Type
Article
Citation
Journal of Actuarial Practice 3 (1995), pp. 25-49
Abstract
The solvency of life insurance companies may be threatened by interest rate risk when the maturities of assets and liabilities are mismatched. The National Association of Insurance Commissioners' (NAIC) multiple scenario cashflow test (MSCFT) and the Office of Thrift Supervision (OTS) net portfolio value model (stock) approaches to financial stress tests are illustrated and analyzed with respect to their capacity to estimate the impact of potential changes in interest rates on life insurance company capital and surplus. Each approach is illustrated with the assets and liabilities of three hypothetical life insurance company capital levels (high, average, and below average) and realistic interest rate scenarios spelled out in the NAIC's standard valuation model law. The supplement to the standard valuation law requires the appointed actuary to serve a dual employee/regulator role in which he/she is required to develop an expert opinion concerning the prospective solvency of his/her employer. The numerical examples point out that the recommended MSCF approach may not identify problem companies. In addition, each appointed actuary's opinion will be based on a unique set of operating assumptions that may preclude the results from being compared cross sectionally or to an absolute regulatory standard. For the stock approach, the OTS specifies the analytic methodology and the set of consistent assumptions. The OTS staff performs the calculations and interprets the results.
Included in
Accounting Commons, Business Administration, Management, and Operations Commons, Corporate Finance Commons, Finance and Financial Management Commons, Insurance Commons, Management Sciences and Quantitative Methods Commons
Comments
Copyright 1995 Absalom Press