Modelling and Valuation of Guarantees in With-Profit and Unitised with Profit Life Insurance Contracts

The purpose of this paper is to develop suitable valuation techniques for the broad category of participating life insurance policies. The nature of the liability implied by these contracts allows treating them as options written on the reference portfolio backing the policy. Consequently, our valuation approach is based on the classical contingent claim theory; in particular, Monte Carlo techniques are used to compute the values of the so called 'policy reserve', that is the guaranteed payoff and the reversionary bonus, and the terminal bonus. The numerical results obtained are used to investigate the sensitivity of the policy reserve and the terminal bonus to changes in the model parameters. The paper also addresses the issue of a fair contract design for with-profit life insurance policies. Bearing in mind that the parameters characterizing the financial market are in general not under the control of the life insurance offce, the implemented valuation procedure is used to determine the feasible set of design parameters that would lead to a fair contract.

[1]  Valuation of the Minimum Guaranteed Return Embedded in Life Insurance Products , 1997 .

[2]  P. D. Needleman,et al.  Asset Shares and their Use in the Financial Management of a With-Profits Fund , 1995, British Actuarial Journal.

[3]  Eduardo S. Schwartz,et al.  The pricing of equity-linked life insurance policies with an asset value guarantee , 1976 .

[4]  R. Chadburn.  CONTROLLING SOLVENCY AND MAXIMISING POLICYHOLDERS' RETURNS: A COMPARISON OF MANAGEMENT STRATEGIES FOR ACCUMULATING WITH-PROFITS LONG-TERM INSURANCE BUSINESS , 1998 .

[5]  Kristian R. Miltersen,et al.  Minimum Rate of Return Guarantees: The Danish Case , 2002 .

[6]  M. Brennan.  Aspects of insurance, intermediation and finance. , 1993 .

[7]  Eric Briys,et al.  Life Insurance in a Contingent Claim Framework: Pricing and Regulatory Implications , 1994 .

[8]  Peter Løchte Jørgensen,et al.  Fair Valuation of Life Insurance Liabilities: The Impact of Interest Rate Guarantees, Surrender Options, and Bonus Policies , 2000 .

[9]  R. Priestley,et al.  A Market-Based Approach to Pricing With-Profits Guarantees , 2000, British Actuarial Journal.

[10]  Steven Haberman,et al.  Valuation of Guaranteed Annuity Conversion Options , 2003 .

[11]  Anders Grosen,et al.  Life Insurance Liabilities at Market Value: An Analysis of Insolvency Risk, Bonus Policy, and Regulatory Intervention Rules in a Barrier Option Framework , 2001 .

[12]  Svein-Arne Persson,et al.  Pricing rate of return guarantees in a Heath-Jarrow-Morton framework , 1999 .

[13]  Eric Briys,et al.  On the Risk of Life Insurance Liabilities: Debunking Some Common Pitfalls , 1997 .

[14]  Anders Grosen,et al.  A Finite Difference Approach to the Valuation of Path Dependent Life Insurance Liabilities , 2001 .

[15]  In Memoriam,et al.  AN OPTION PRICING APPROACH TO BONUS POLICY BY A. D. WILKIE , 2003 .