Interest Rate Risks and Simulation

Interest rates are, with probability one, not constant over the course of life insurance risks. As remarked by Hickman (1985), “Interest rate variation and resulting risk is a fact of business life.” Fortunately, previously developed concepts based on the present value of loss variables extend immediately to the case where the interest environment, although non-constant, is known in advance. We can quantify the impact of uncertainty in the interest environment by introducing concepts of diversifiability for a portfolio of risks. Modeling uncertainty in the interest environment requires complex tools – this module introduces simulation techniques as one such useful tool.

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