Solvency Capital Requirement for German Unit-Linked Insurance Products

Innovative life insurance products such as unit-linked life insurance, hybrid life insurance, and variable annuities are rapidly gaining popularity and becoming a major part of new business in Germany. However, since traditional life insurance products still dominate the portfolios of life insurance companies, discussions about the standard formula for determining the solvency capital requirement have focused on this type of business. Any detailed discussion on how to calculate the solvency capital requirement for innovative life insurance products within the standard formula has yet to occur. This paper brings to light some interesting facts about unit-linked business and Solvency II. In particular, it analyzes the impact of the transition from Solvency I to Solvency II on the solvency capital requirement of a German unit-linked insurance product with guaranteed death benefits. The modeling of lapses is another focus of research, reflecting the increased importance of lapse risks for innovative life insurance products. Since there are strong concerns about nonlinearities between the various risks, especially between market risk and lapse risk, the paper examines this problem as well. Finally, an alternative method for calculating the net solvency capital requirement, the so-called single equivalent scenario (also referred to as the killerscenario), is presented.