A Study on the Risk and Return Sharing Mechanism for Interest-sensitive Life Insurance Products under IFRS 17 Accounting

Richard Lu, Jai-Jen Wang and Shin-Hung Pan
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Richard Lu: Department of Risk Management and Insurance, Feng Chia University, Taiwan
Jai-Jen Wang: Department of Finance, Feng Chia University, Taiwan
Shin-Hung Pan: Department of M-Commerce and Multimedia Applications, Asia University, Taiwan

Advances in Decision Sciences, 2022, vol. 26, issue Special, 40-52

Abstract: [Purpose] This paper analyzes how the share mechanism of interest-sensitive life insurance products affect the investment risk and returns for insurer and policyholders. [Design/methodology/approach] For this purpose, we use the idea of contract service margin and loss component in IFRS17 and Monte Carlo simulations, this study provides some numerical results of return and risk sharing under different share mechanism by setting various minimum crediting rates and share portions. [Findings] Given a minimum crediting rate and share portion, the numerical results can show that what average IRR policyholders could have and what average profit the insurer can obtain. The results also indicates that the part of market risk belongs to the insurer. Finally, the market risk-adjusted return can be calculated for the insurer. [Originality/Value] Our approach, results and conclusions are original and new in the literature.

Keywords: Interest-sensitive Life Insurance; Share Mechanism; Contract Service Margin; IFRS17 (search for similar items in EconPapers)
JEL-codes: G11 G52 (search for similar items in EconPapers)
Date: 2022
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