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Effect of Minimum Interest Guarantees on Life Insurance Liability Values

Abstract

Minimum interest guarantees are contractual provisions in life insurance policies that specify a minimum rate of interest to be credited to policy values or accumulated benefits, regardless of changes in prevailing market interest rates. These guarantees can provide policyholders with a defined level of value accumulation but may create additional financial obligations for insurers when actual investment returns fall below the guaranteed rate. The valuation of such guarantees is therefore an important consideration in estimating life insurance liabilities. This study will examine the effect of minimum interest guarantees on life insurance liability values. It will assess how different guaranteed interest rates influence the present value of future policy benefits and determine the extent to which minimum guarantees affect the liabilities recognised by life insurance companies. The study will also compare liability values under alternative guaranteed interest rate levels and interest rate scenarios. The study will focus on minimum interest guarantees, life insurance liability values, actuarial valuation, guaranteed interest rates, policy benefits, policy cash values, investment returns, interest rate assumptions, policy duration, and insurance liabilities. Actuarial valuation techniques will be used to estimate the financial obligations arising from guaranteed interest provisions. The study will also examine the sensitivity of liability values to changes in guaranteed rates, prevailing interest rates, mortality assumptions, and policyholder behaviour. A quantitative research approach will be adopted for the study. Historical life insurance policy, interest rate, investment return, mortality, premium, and benefit data will be analysed using descriptive statistics, actuarial valuation models, present value calculations, scenario analysis, comparative analysis, and sensitivity analysis. Life insurance liabilities will be estimated under different minimum interest guarantee levels and compared to determine their effect on projected liability values. The study is expected to reveal that minimum interest guarantees may have a significant effect on life insurance liability values. Higher guaranteed interest rates may increase projected liabilities, particularly when prevailing investment returns are below the guaranteed level, while lower guarantees may result in relatively lower liability requirements. The magnitude of the effect may depend on policy duration, guarantee levels, investment returns, interest rate movements, mortality assumptions, policyholder behaviour, and the structure of the insurance contract. The study will be useful to actuaries, life insurance companies, valuation analysts, investment managers, financial managers, regulators, risk managers, and researchers. It may provide useful information for evaluating guaranteed interest provisions, improving liability valuation, assessing interest rate risk, strengthening product pricing, and supporting effective management of long-term insurance obligations. The findings may also assist insurers in understanding the financial implications of minimum guarantees under different economic conditions. The study concludes that minimum interest guarantees are important considerations in life insurance liability valuation because guaranteed returns can increase the financial obligations associated with insurance contracts, particularly under adverse interest rate conditions. It is therefore recommended that insurers and actuaries regularly evaluate guaranteed interest provisions, incorporate appropriate interest rate scenarios into liability models, and conduct sensitivity analysis to support accurate and sustainable life insurance liability estimates.

Keywords: Minimum interest guarantees, life insurance liability values, guaranteed interest rates, actuarial valuation, insurance liabilities, policy benefits, policy cash values, investment returns, interest rate assumptions, interest rate risk, policy duration, mortality assumptions, policyholder behaviour, liability estimation, life insurance valuation.