From 'Benefits' to 'Guarantees': Looking at Life Insurance Products in a New Framework

Abstract

Many modern insurance products are designed as packages, whose items may be either included or not in the product actually purchased by the client. For example: the endowment insurance which can include various rider benefits and options, the Universal Life insurance, the Variable Annuities, the presence of possible LTC benefits in pension products.The benefits provided by these products imply a wide range of 'guarantees' and hence risks borne by the insurance company (or the pension fund). Guarantees and inherent risks clearly emerge in recent scenarios, in particular because of volatility in the financial markets and trends in mortality/longevity. Appropriate modeling tools are then needed for pricing and reserving. Hence, a progressive shift from expected present values, and their prominent role in life insurance (and pension) calculations, to more modern and complex approaches, viz the Enterprise Risk Management based approach, is currently updating the actuarial toolkit.However the implementation of complex mathematical methods often constitutes, on the one hand, an obstacle on the way towards sound pricing and reserving principles. On the other hand, facing the risks by charging very high premiums trivially reduces the insurer’s market share. Then, alternative solutions can be suggested by an appropriate product design which aims at sharing risks between the insurer and the policyholders. Interesting examples are provided by the design of life annuities as regards the longevity risk, and by profit participation mechanisms as regards the financial market risks.