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

191 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2001.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.U of I OnlyRestricted to the U of I community idenfinitely during batch ingest of legacy ETD