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Sustainability in life insurance (Part 2) - how to analyse the dynamics of premium reserves

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Added , Speaker Hans-Jochen Bartels (Universität Mannheim), Johannes Bartels (BaFin), VICA2018, in AFIR / ERM LIFE
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Speaker(s): Hans-Jochen Bartels (Universität Mannheim)

This contribution considers the capital requirements for portfolios of ordinary life annuity contracts under the regime of Solvency II (SII). The dynamic behaviour of the capital requirements under the regime of SII is discussed. Since the major part of the technical provisions under SII is represented by the net premium reserves of simple annuities omitting future profit participation and death benefits, the mentioned articles investigate only the dynamic behaviour of solvency reserves for the net premium reserves, in order to keep things simple. The purpose of this contribution is to extend these results, taking into account the benefits already guaranteed as well as future profit participation. Typically the premiums contain a safety loading and this creates a systematic surplus, which is by law partially the property of the insured and has to be repaid in form of a so-called bonus. Actuarial literature distinguish between premiums calculated on a first order technical basis with hypothetical assumptions about interest, mortality and costs and more realistic values determined by experience, called second order data. In the so-called demand of interest on the initial capital - the SII premium reserves is discussed - in order to fit the balance for SII capital requirements in the next year. The main and unexpected result was, that even for a portfolio of simple annuities calculated with say guaranteed interest rate of 1;25% the demand of interest in one year is greater than 3%. Now, the recursions of SII capital year by year are modified, using second order data, i.e. realistic values of mortality and costs. But the crucial results does not change qualitatively: Even if a life insurance company fulfills the capital requirements of SII say in 2016 the described effect may cause problems in future times and solvency is not sustainable.

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