Abstract
The purpose of this paper is to conduct a market-consistent valuation of life insurance participating liabilities sold to a population of partially heterogeneous customers under the joint impact of biometric and financial risk. In particular, the heterogeneity between groups of policyholders stems from their offered minimum interest rate guarantees and contract maturities. We analyse the effects of these features on the company’s insolvency while embracing the insurer’s goal to achieve the same expected return for different cohorts of policyholders. Within our extensive numerical analyses, we determine the fair participation rates and other key figures, and discuss the implications for the stakeholders, taking account of various degrees of conservativeness of the insurer when pricing the contracts.
Highlights
This paper focuses on the market-consistent valuation of life insurance liabilities, a topic which has recently again attracted much attention both from academics and practitioners, see, for example, Sheldon and Smith (2004), Bauer et al (2010), Broeders et al (2013), Gambaro et al (2019), Dorobantu et al (2020) and Ghalehjooghi and Pelsser (2020)
We propose a contingent claim model, along the lines of Briys and de Varenne (1994, 1997), for the valuation of the equity and the liabilities of a participating life insurance company
Participating life insurance products with minimum guarantees still represent a large portion of the contract portfolios of many life insurers
Summary
This paper focuses on the market-consistent valuation of life insurance liabilities, a topic which has recently again attracted much attention both from academics and practitioners, see, for example, Sheldon and Smith (2004), Bauer et al (2010), Broeders et al (2013), Gambaro et al (2019), Dorobantu et al (2020) and Ghalehjooghi and Pelsser (2020). This growing interest mostly stems from the long-sought adoption of fair value based accounting standards in many countries, culminating with the full implementation of Solvency. The pioneering model by Briys and de Varenne (1994, 1997) has been extended in several directions, e.g., by Grosen and Jørgensen (2002), Bernard et al (2005), Chen and Suchanecki (2007), Cheng and Li (2018), Bacinello et al (2018), Hieber et al (2019)
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