Modelling and Valuation of Guarantees in With-Profit and Unitised with Profit Life Insurance Contracts

27 Pages Posted: 28 Nov 2005

See all articles by Steven Haberman

Steven Haberman

City University London - Faculty of Actuarial Science

Laura Ballotta

Sir John Cass Business School - City, University of London

Nan Wang

City University London - Faculty of Actuarial Science

Date Written: April 2003

Abstract

The purpose of this paper is to develop suitable valuation techniques for the broad category of participating life insurance policies. The nature of the liability implied by these contracts allows treating them as options written on the reference portfolio backing the policy. Consequently, our valuation approach is based on the classical contingent claim theory; in particular, Monte Carlo techniques are used to compute the values of the so called 'policy reserve', that is the guaranteed payoff and the reversionary bonus, and the terminal bonus. The numerical results obtained are used to investigate the sensitivity of the policy reserve and the terminal bonus to changes in the model parameters. The paper also addresses the issue of a fair contract design for with-profit life insurance policies. Bearing in mind that the parameters characterizing the financial market are in general not under the control of the life insurance offce, the implemented valuation procedure is used to determine the feasible set of design parameters that would lead to a fair contract.

Keywords: Contingent Claim theory, Fair valuation, Participating contracts

JEL Classification: G13, G23

Suggested Citation

Haberman, Steven and Ballotta, Laura and Wang, Nan, Modelling and Valuation of Guarantees in With-Profit and Unitised with Profit Life Insurance Contracts (April 2003). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=856444 or http://dx.doi.org/10.2139/ssrn.856444

Steven Haberman

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

Laura Ballotta (Contact Author)

Sir John Cass Business School - City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.city.ac.uk/people/academics/laura-ballotta

Nan Wang

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

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