The Advanced Econometrics of Continuous Risk-Free Interest Rate Modelling and Implementation for Life Insurance Valuation

Abstract

Most analytically driven interest rate derivations initiated in life contingencies are deemed fair to life insurers in meeting solvency requirements which arguably may not be satisfactorily fair to the insured. The arguments presented in this paper are written from the practical underwriting perspectives and are aimed at circumventing the comparatively intractable process of interest rate computations. The objectives are to obtain the hedge ratio each term of which is based on the uniform distribution of death assumption, use this ratio to derive power series in terms of Bernoulli numbers, estimate the risk-free interest rate intensities from the power series and compare the exact result with the estimated results. Given a tolerance limit of 0.4%, computational evidence shows that the absolute deviation of the exact from the estimated interest rate is less than 0.4%, it may be fairer to the insured in the performance of actuarial valuation involving present values computations.