Modeling the impact of economic and financial variables on the balance sheets of life insurance companies in France.

Summary The balance sheet of life insurance companies can be assimilated to a portfolio of financial products whose value depends on the evolution of economic and financial variables. First, it is shown that the evolution of the values of economic variables (GDP, industrial production, . . . ) and financial variables (stocks and interest rates) are linked by a long term equilibrium relationship. In a second step, the risks induced by the evolution of financial variables are analyzed. In particular, the impact of the evolution of the value of financial variables on the behavior of insurers is highlighted. Indeed, the early surrender behavior depends not only on the maturity of the contract and the evolution of taxation but also on the evolution of some interest rates. The cost and strategy of hedging this risk are modeled. Finally, the financial risk analysis methods used in insurance companies are presented. After a description of single period models, the balance sheet of a life insurance company is modeled as a whole in a multiperiod context and by integrating the correlations between financial assets. At the same time, the sensitivity of the value of a company to changes in the values of financial variables is calculated from stock prices.