Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option

25 Pages Posted: 8 May 2006

See all articles by Laura Ballotta

Laura Ballotta

Sir John Cass Business School - City, University of London

Steven Haberman

City University London - Faculty of Actuarial Science

Nan Wang

City University London - Faculty of Actuarial Science

Abstract

The purpose of the article is to apply contingent claim theory to the valuation of the type of participating life insurance policies commonly sold in the UK. The article extends the techniques developed by Haberman, Ballotta, and Wang (2003) to allow for the default option. The default option is a feature of the design of these policies, which recognizes that the insurance company's liability is limited by the market value of the reference portfolio of assets underlying the policies that have been sold. The valuation approach is based on the classical contingent claim pricing 'machinery', underpinned by Monte Carlo techniques for the computation of fair values. The article addresses in particular the issue of a fair contract design for a complex type of participating policy and analyzes in detail the feasible set of policy design parameters that would lead to a fair contract and the trade-offs between these parameters.

Suggested Citation

Ballotta, Laura and Haberman, Steven and Wang, Nan, Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option. Journal of Risk and Insurance, Vol. 73, No. 1, pp. 97-121, March 2006. Available at SSRN: https://ssrn.com/abstract=886801 or http://dx.doi.org/10.1111/j.1539-6975.2006.00167.x

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

Steven Haberman

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

Nan Wang

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

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