Investment Guarantees in the South African Life Insurance Industry

Abstract

This paper explores the risks faced by South African life insurance companies arising from the provision of investment guarantees in products sold. The current thinking and practice of the larger South African life insurance companies regarding investment guarantees is set out following their responses to a survey. The paper examines the forms of investment guarantee available and the business issues created by the writing of these guarantees. These include issues around the design and pricing of new business, as well as the risk management of in-force business. The paper also compares existing methods used internationally to value life insurance business with investment guarantees, focusing on the use of stochastic models. The different allowances for risk within each valuation method and the appropriateness of these allowances when valuing investment guarantees are considered. The stochastic models compared include both statistically based real-world models and market-consistent state-price-deflator or risk-neutral models. Practical issues around the building of such asset–liability stochastic models are briefly discussed. Finally, the authors put forward their own views of possible developments in the future within South Africa that may impact on life insurance business with investment guarantees, and the possible implications. Keywords: Investment guarantee; maturity guarantee; South Africa; non-profit guarantee; smoothed-bonus business; asset–liability matching; market risk premium; financial options; hedging; equity volatility; stochastic modelling; market-consistent valuation South African Actuarial Journal: 2003 3: 29-76