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Net Reserve Calculation for Whole Life Insurance Under Mean-Reverting Stochastic Interest Rate Models

Author

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  • Lyu Haoqi

    (Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong)

  • Yang Hailiang

    (Department of Financial and Actuarial Mathematics, Xi’an Jiaotong-Liverpool University, Suzhou, China)

Abstract

Reserve calculation is crucial for insurance companies. Due to the long-term nature of life insurance products, stochastic interest rate models are more suitable when calculating the premium and reserve of a life insurance product. In this article, we use several popular mean-reverting stochastic interest rate models to study the impact of the model and its parameters on the values of reserves for life insurance products. We employ linear regression, moment estimation, and error optimization methods to calibrate the Vasicek, Cox-Ingersoll-Ross (CIR), CIR#, and Chen models. Our analysis reveals that when applying mean-reverting stochastic interest rate models to a whole life insurance policy, the initial interest rate and the long-term mean have a significant influence on the net reserve value. However, the speed of reversion and volatility only marginally impact the net reserve. Additionally, we observe that the numerical result of the net reserve is sensitive to the time period of the interest rate data and the term structures of the yield rates used in the analysis.

Suggested Citation

  • Lyu Haoqi & Yang Hailiang, 2025. "Net Reserve Calculation for Whole Life Insurance Under Mean-Reverting Stochastic Interest Rate Models," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 19(2), pages 87-116.
    • Handle: RePEc:bpj:apjrin:v:19:y:2025:i:2:p:87-116:n:1001
    DOI: 10.1515/apjri-2023-0044
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