Valuation of the Minimum Guaranteed Return Embedded in Life Insurance Products

WFIC 96-20

Posted: 23 Apr 1998

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Svein-Arne Persson

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1996

Abstract

Consider a traditional life insurance contract paid with a single premium. In addition to mortality factors, the relationship between the fixed amount of benefit and the single premium depends on the interest rate (calculation rate). The calculation rate can be interpreted as the average rate the insurance company must earn on its investment in the insurance period to fulfill its future obligations. In many countries the traditional life insurance products include a fixed percentage guarantee on each year's return. This annual guarantee comes in addition to the fixed benefit. Furthermore, no extra premium is charged for this guarantee. In this article we present a model for the valuation of life insurance contracts including a guaranteed minimum return. The model is based on the notion of no arbitrage opportunities from the theories of financial economics. Numerical examples indicate that these guarantees may have substantial market values.

JEL Classification: G22

Suggested Citation

Aase, Knut K. and Persson, Svein-Arne, Valuation of the Minimum Guaranteed Return Embedded in Life Insurance Products (May 1996). WFIC 96-20. Available at SSRN: https://ssrn.com/abstract=7510

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Svein-Arne Persson (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
47-55-95-90-00 (Phone)
47-55-95-96-47 (Fax)

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