The Effects of Multifactor Term Structure Models on the Valuation of Insurance

This research investigates the importance of the underlying assumption of interest rate movements when valuing insurance. Movements in interest rates affect the present value of both property-liability and life insurance obligations. One approach to understanding the amount of interest rate risk inherent to insurers is to perform a financial analysis that incorporates a stochastic model of interest rate changes. Many of these term structure models use only one stochastic variable to project the path of future interest rates. The benefit of one-factor models is that they are simpler to use than multi-factor approaches. This research investigates the importance of incorporating a second stochastic factor in the financial analysis of an insurance company to determine if there are any effects on interest rate risk. Three applications are considered: (1) options on Eurodollar futures contracts, (2) dynamic financial analysis of property-liability insurance, and (3) whole life insurance. The approach of this study is to compare the results of the analysis under both a one- and a two-factor Hull-White term structure model and investigate the uncertainty under the alternative interest rate distributions. The objective of this dissertation is to determine if a more complex term structure model is required to capture the actual interest rate risk of insurance.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Finance

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2015

Author dc:creator

• Ahlgrim, Kevin C.

Contributors dc:contributor

• D'Arcy, Stephen P.

• Economics, Finance

Language dc:language

eng

Identifier

(MiAaPQ)AAI3017012

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/87424