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I have a few different questions on topics involving an doing risk management in life insurance. If someone could shed some light on these issues, I would be very thankful.

a) How does an actuary do the solvability calculations as imposed by Solvency II in practice? What does this look like?

b) What does an internal model in life insurance look like?

c) What does the implementation of risk limit systems look like?

d) What are the most important risks that life insurance companies face? Obviously, the fluctuation of interest rates is one such risk. What are others?

e) Why is it worse for a life insurance company if the market's interest rate rises? If the interest rate grows, then the bonds are worth less. But if the interest rate drops, then the company's investments don't generate as much revenue. So why is it worse if the interest rates rise?

I would be very grateful for some resources, where these subjects are explained, in an easy to understand language.

A few other questions on different topics:

  1. For which casualty lines are heavy tail distributions used, except fire and liability (industry)?

  2. Similarly, where are light tail distributions usually used?

  3. Is ruin theory used in practice? How strong are ruin probabilities dependent on the distribution class used in calculations?

  4. What are the similarities and differences between Solvency II and MaRisk (VA)?

  5. How do you determine the rating of a specific financial position if you know its VaR?

As I said, if you can contribute in any way, so that I can get some answers to these questions, please do so. Your input is priceless for me.

Thank you very much for your time!

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That's a lot of questions, why not split them? – Bob Jansen Dec 6 '12 at 6:14

Well, 2 answers I knew right away :-)

d) That depends on what is insured. In classical life insurance (person gets sum insured in case of death only) one risk would be large catastrophes with many insured people involved (like 9/11, for example). A "larger" risk is, as you said, change in interest rate, though. In Germany (I don't know about other countries) there are mixed life insurance treaties where you get also money when reaching a certain age. For those contracts, longevity is a huge risk. That is, if people live longer in general, for example because of better medical care and therefore old/false probabilities are used for calculation.

e) I think it is because the market interest rate is used as a benchmark in the portfolio management of the insurance company. On all the money you have from people insured, you have to earn (and pay them or write as benefit to their contract) the market interest rate. When it rises, but you have too many bonds etc. at a lower interest rate it is difficult to reach the rising interest rate on your overall assets / portfolio.

Take care, regulations on life insurance are different in different countries...

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