Risk-neutral valuation of participating life insurance contracts [An article from: Insurance Mathematics and Economics]

This digital document is a journal article from Insurance Mathematics and Economics, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
The valuation of life insurance contracts using concepts from financial mathematics has recently attracted considerable interest in academia as well as among practitioners. In this paper, we will investigate the valuation of participating contracts, which are characterized by embedded interest rate guarantees and some bonus distribution rules. We will model these under the specific regulatory framework in Germany; however, our analysis can be applied to any insurance market with cliquet-style guarantees. We will present a framework, in which different kinds of guarantees or options can be analyzed separately. Also, the practical implementation of such models is discussed. We use two different numerical approaches to derive fair parameter settings of such contracts and price the embedded options. The sensitivity of the contract value with respect to multiple parameters is studied. In particular, we find that life insurers offer interest rate guarantees below their risk-neutral value. Furthermore, the financial strength of an insurance company considerably affects the value of a contract.