Development and Pricing of a New Participating Contract

North American Actuarial Journal, Vol. 10, No. 4, pp. 179-195, 2006

22 Pages Posted: 30 Jan 2006 Last revised: 1 Mar 2010

See all articles by Carole Bernard

Carole Bernard

Grenoble Ecole de Management; Vrije Universiteit Brussel (VUB)

Olivier Le Courtois

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

Francois Quittard-Pinon

EMLYON Business School

Date Written: January 26, 2006

Abstract

The purpose of this article is to design and price a new type of participating life insurance contract. Participating contracts are popular in the US and in European countries; they satisfy various covenants and obey various regulations depending on the country where they are issued. The standard literature is Briys and de Varenne [1994, 1997a] and Grosen and Jorgensen [2000], to quote only a few. Bernard, Le Courtois and Quittard-Pinon [2005] studied a particular type of participating contract, where a Vasicek model of interest rates is assumed and where the potential default of the issuing company is taken into account. In this paper, we design a new type of participating contract very similar to the one considered in the above-mentioned study, but where the guaranteed rate corresponds to the return of a portfolio of Government bonds. We show that this new type of contract can be valued in closed-form, even when the interest rates are stochastic and default of the company is taken into account.

Keywords: Participating Life Insurance Policies, Contingent Claims Valuation, Default Risk, Stochastic Interest Rates, Dubins-Schwarz theorem

JEL Classification: G13, G22

Suggested Citation

Bernard, Carole and Le Courtois, Olivier Arnaud and Quittard-Pinon, Francois, Development and Pricing of a New Participating Contract (January 26, 2006). North American Actuarial Journal, Vol. 10, No. 4, pp. 179-195, 2006. Available at SSRN: https://ssrn.com/abstract=879262

Carole Bernard (Contact Author)

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

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

Francois Quittard-Pinon

EMLYON Business School ( email )

23, Avenue Guy de Collongue
69134, Ecully
France

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