Profit Testing of Profit Sharing Life Insurance Policies in the Presence of Extreme Risks

Asia-Pacific Journal of Risk and Insurance, Forthcoming

28 Pages Posted: 10 Jun 2018 Last revised: 2 Dec 2020

See all articles by Olivier Le Courtois

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Li Shen

EMLYON Business School; EM Lyon (Ecole de Management de Lyon)

Date Written: May 25, 2018

Abstract

This paper examines the profit testing of life insurance companies that issue participating policies, type B and type A universal life policies, and variable annuities with guaranteed minimum maturity and death benefits, when investment returns are stochastic and modeled by normal or variance gamma distributions. We rely on the stochastic profit testing techniques introduced in Dickson, Hardy, and Waters (2013) to examine the influence of the models' parameters and of the models themselves on the profit testing indicators. We show that the variance gamma model results in more conservative predictions - in a smaller expected net present value and in larger risk indicators for the net present value - than the normal model for participating policies and universal life policies. The paper also shows that variable annuities with guaranteed minimum maturity benefits are little sensitive to the choice of model. For variable annuities with guaranteed minimum death benefits, we show that the expected net present value is higher but that the risk indicators built on the net present value remain higher in the variance gamma model.

Keywords: Profit Testing, Participating Contract, Universal Life Contract, Variable Annuities With Guarantees, Gaussian and Non-Gaussian Assumptions, Variance Gamma Process

Suggested Citation

Le Courtois, Olivier Arnaud and Shen, Li, Profit Testing of Profit Sharing Life Insurance Policies in the Presence of Extreme Risks (May 25, 2018). Asia-Pacific Journal of Risk and Insurance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3184789 or http://dx.doi.org/10.2139/ssrn.3184789

Olivier Arnaud Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Li Shen (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

EM Lyon (Ecole de Management de Lyon) ( email )

23 Ave Guy de Collongue
Ecully, 69134
France

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