# Life Insurance Model Build a life insurance model that bridges actuarial science and corporate finance. Forecast policyholder behaviour, manage reserves, and monitor regulatory capital buffers across the book of business. - Canonical: https://finamodel.com/templates/life-insurance-model - Excel download: https://finamodel.com/templates/life-insurance.xlsx - Category: Insurance - Model type: Portfolio - Difficulty: Intermediate - Audiences: Investors & analysts, Credit & risk, Insurance Actuaries, Life Insurers, M&A Teams, Insurance Investors - Tags: life-insurance, valuation, mortality, embedded-value, lapse ## Overview A Life Insurance Valuation Model values an in-force book of life and health insurance policies using actuarial, financial, and cash flow mechanics. It projects net earned premiums (after reinsurance ceded), net incurred claims (driven by mortality and lapse assumptions), acquisition costs, and operating expenses to produce statutory surplus and free surplus - the basis for dividend capacity and embedded value. The model uses a lag-one dividend rule to avoid circularity: dividends in year t = max(0, free surplus from year t-1 × dividend payout rate). This is critical because current-year dividends cannot depend on current-year retained earnings that those dividends affect. The core three-statement structure includes Premium_Build (policy count, retention, growth), Claims_Reserves (loss ratios, reserve roll-forward), and Opex_DAC schedules (deferred acquisition costs capitalized at 70% of commissions, amortized over 5 years). The Statutory_Capital sheet translates GAAP equity to statutory surplus by removing the DAC asset (not admissible under US statutory accounting) and adding back reserve adjustments. A Risk-Based Capital (RBC) framework checks 250-300% minimum RBC ratio typical for A-rated carriers; free surplus = statutory surplus minus required capital. The Dividends sheet models distributions to policyholders subject to the 10% rule or the state insurance commissioner's approval threshold. This model applies to insurance investors, M&A buyers, and rating agencies evaluating mid-market carriers ($500M-$2B GWP). Key metrics include combined ratio (claims + expenses as % of net earned premium; target 85-95% for profitability), embedded value (PV of future profits), dividend sustainability, and RBC headroom. A typical $1B GWP carrier generates 14-18% ROE with 20-25% statutory capital ratios. ## What's included - Cohort-based premium and benefit roll-forward - Actuarial assumption dashboard for mortality, lapse, and expenses - Statutory and GAAP financial statement integration - Asset-liability matching analysis - Solvency II and risk-based capital requirement calculator - Premium income by policy type and age cohort - Mortality assumptions from actuarial tables with stress factors - Lapse and surrender rates by policy duration and performance - Claims payout and expense reserves - Acquisition costs, commissions, and administrative expenses - Risk-adjusted discount rate and embedded value calculation ## Evaluating a Life Insurance Model for Capital and Dividend Insights This life insurance model projects the financial trajectory of a mid-market US carrier, integrating GAAP statements with statutory capital and embedded value. It captures policyholder behaviour, reserve builds, and regulatory buffers, helping users assess dividend capacity and intrinsic value without assuming market facts. ### Operating Drivers Behind Premium and Claims The model begins with a policy roll-forward that combines existing policies, a retention rate, and new business to produce gross written premium. Net written premium then applies a quota-share cession, and net earned premium follows from the change in unearned premium. - Claims are driven by blended loss ratios applied to net earned premium, with reinsurance recoveries reducing gross incurred claims. Operating expenses are largely proportional to net earned premium, while commissions are partially deferred as a DAC asset. - These relationships let you trace how changes in retention, pricing, or claims experience flow through revenue and costs. ### Calculation Flow from Assumptions to Statements All drivers are single-cell named assumptions that feed the premium, claims, and expense schedules. Those schedules populate the GAAP income statement and balance sheet. - The balance sheet uses the investment portfolio as the balancing asset, while cash is a positive operating buffer. The statutory capital sheet then bridges GAAP equity to statutory surplus by deducting non-admitted items and adding a capped surplus note. - This bridge always reduces equity, so statutory surplus remains at or below GAAP equity. Free surplus emerges after covering required capital, and dividends are set with a lag, using prior-year free surplus to avoid circularity. ### Outputs for Capital Adequacy and Valuation The model generates a full set of GAAP statements, a statutory capital schedule with an RBC ratio, and a cash flow statement using the indirect method. - Free surplus feeds a dividend discount valuation, and embedded value is computed on new business only. - A scenario toggle allows Base, Adverse, or Stress conditions to alter mortality, lapse, yield, and catastrophe losses, with the sensitivity sheet reporting live KPI impacts. - These outputs support analysis of dividend-paying capacity and intrinsic value, but the public download provides only a values-only preview, not live formulas or automatic recalculation. ### Practical Use in Insurance Analysis This template is designed for evaluating a mid-market US life and health carrier, not for other sectors or international accounting frameworks. - It helps users explore how underwriting profitability, investment yield, and capital generation interact to determine shareholder distributions. - The checks built into the model highlight potential issues such as negative cash or dividends exceeding net income, and they can fail under stress. - By linking premium growth, reserve builds, and regulatory constraints, the model offers a structured way to assess financial strength and valuation drivers without relying on market benchmarks or external data. ## Built for insurance economics Use this model when policyholder behaviour, reserve adequacy, and regulatory capital requirements are the core drivers of business performance. ## Handles actuarial complexity A strong life insurance model incorporates mortality tables, dynamic lapse rates, and deferred acquisition cost valuation for institutional-grade accuracy. ## Useful for product testing and M&A Evaluate new product profitability, calculate embedded value for transactions, or optimise reinsurance treaty structures. ## Built for insurance economics Use this model when policyholder behaviour, reserve adequacy, and regulatory capital requirements are the core drivers of business performance. ## Handles actuarial complexity A strong life insurance model incorporates mortality tables, dynamic lapse rates, and deferred acquisition cost valuation for institutional-grade accuracy. ## Useful for product testing and M&A Evaluate new product profitability, calculate embedded value for transactions, or optimise reinsurance treaty structures. ## Features - **Cohort-based projections:** Track separate cash flows for groups of policies by issue age, type, and vintage to reflect different surrender and mortality profiles. - **Lapse sensitivity:** Model how interest rates, market performance, and policy pricing affect customer behavior and ultimate lifetime value per policy. - **Embedded value reporting:** Calculate present value of in-force cash flows minus cost of capital and cost of holding risks, per regulatory and investor standards. ## Use cases - **In-force book valuation:** Determine fair value and embedded value for financial reporting, M&A, or capital allocation decisions. - **Product profitability analysis:** Compare lifetime value across different product types to optimize product mix and distribution strategy. - **Risk and sensitivity management:** Stress test on mortality spikes, mass surrender events, and interest rate changes to assess downside scenarios. ## Frequently asked questions ### What is a life insurance financial model? It is a model that forecasts premium income, policyholder claims, reserves, investment returns, and regulatory capital for a life insurance book of business. ### Who uses life insurance models? Insurance CFOs, actuarial consultants, insurtech founders, and reinsurance analysts use them for product pricing, reserving, and capital planning. ### What should a life insurance model include? It should include actuarial assumptions, cohort-based premium forecasting, reserve calculations, investment income, and solvency capital outputs. ### Does it support different regulatory regimes? Yes. The capital adequacy section is modular, supporting US risk-based capital, EU Solvency II, or custom local statutory requirements. ### Can I model reinsurance structures? Yes. The model supports quota share, excess of loss, and stop-loss reinsurance structures to evaluate the impact on net claims volatility and capital relief. ## Related templates - [Insurance Portfolio Risk and Return Model](https://finamodel.com/templates/insurance-portfolio-model) - [Reinsurance Company Underwriting Model](https://finamodel.com/templates/reinsurance-model) - [Captive Insurance Company Model](https://finamodel.com/templates/captive-insurance-model)