Surplus participation schemes for life annuities under Solvency II

Abstract

Under the new European Solvency II capital requirements life insurance companies have to implement a market-consistent valuation framework. A special challenge is the estimation of the market value of liabilities for products containing future discretionary surplus payments such as with-profit or participating life annuities (PLAs). We develop a realistic stochastic asset and liability company model with longevity and capital market risk for participating life annuities. Based on this model we project future cash flows to policyholders and calculate the solvency capital requirement (SCR) over the cohort’s lifetime. Besides the insurer’s point of view, we also analyse the utility implications for different types of annuitants. Our model and analysis are not only interesting for those acting under Solvency II regulation, but also in further economic valuation frameworks of the pension business of insurance companies.