Implicit options in life insurance: An overview

Abstract

Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. In this article, we first present the different contract designs in Europe and the United States and point out differences in the contract design. Second, a comprehensive overview and description of implicit options contained in these contracts is provided. With focus on participating contracts, we present contract design, valuation methods, and main results of several recent articles in this field. The study indicates that current developments regarding regulation (Solvency II, Swiss Solvency Test), accounting (IFRS), customer needs, and secondary life insurance markets may lead to a trend away from traditional contract design of participating policies and toward new products that are of a more transparent modular form such as variable annuities. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.