Sensitivity Of Life Insurance Company Financials To Changes In Premiums And Interest Rates: A Teaching Note On Policy Reserves

Policy reserve allocations of life insurance firms are extremely sensitive to changes in premiums and interest rates and therefore it is recommended that state regulators and life insurance actuaries pay close attention to ensure the solvency of firms. This paper uses a simple example of a 10-year term-life insurance contract with level premiums to show that relatively small changes in level premiums and interest rates can affect the financials of a life insurance firm significantly.