Risk-neutral valuation of participating life insurance contracts

Bauer, Daniel J.; Kiesel, Rüdiger; Kling, Alexander; Ruß, Jochen

doi:10.1016/j.insmatheco.2006.02.003

Cited by 77 publications

(97 citation statements)

References 11 publications

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“…The distribution mechanisms considered in Bauer et al (2006) also satisfy the general principles provided in Grosen and Jørgensen (2000). Additionally, their general framework allows for payments to the shareholders of the company as a compensation for the adopted risk.…”

Section: Introductionmentioning

confidence: 99%

“…Additionally, their general framework allows for payments to the shareholders of the company as a compensation for the adopted risk. Furthermore, Bauer et al (2006) show how the value of a contract can be separated into its single components and derive an equilibrium condition for a fair contract.…”

Section: Introductionmentioning

confidence: 99%

“…The present paper fills this gap: We adopt the methodology presented in Bauer et al (2006) and incorporate more consistent models for the behavior of interest rates into their model. In order to take into account all typical components of a participating life insurance contract, different numerical methods are presented.…”

Section: Introductionmentioning

confidence: 99%

“…The remainder of the paper is organized as follows: In Section 2 and 3 we briefly introduce the model and valuation methodology from Bauer et al (2006), respectively. Section 4 presents the valuation approaches.…”

Section: Introductionmentioning

confidence: 99%

“…In particular, the different option elements can be priced and analyzed separately. We use Monte Carlo and discretization methods to derive the respective values.The sensitivity of the contract and guarantee values with respect to multiple parameters is studied using the bonus distribution schemes as introduced in Bauer et al (2006). Surprisingly, even though the value of the contract as a whole is only moderately affected by the stochasticity of the short rate of interest, the value of the different embedded options is altered considerably in comparison to the value under constant interest rates.…”

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confidence: 99%

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Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment

Zaglauer

Bauer

2008

Insurance: Mathematics and Economics

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Over the last years the valuation of life insurance contracts using concepts from financial mathematics has become a popular research area for actuaries as well as financial economists. In particular, several methods have been proposed of how to model and price participating policies, which are characterized by an annual interest rate guarantee and some bonus distribution rules. However, despite the long terms of life insurance products, most valuation models allowing for sophisticated bonus distribution rules and the inclusion of frequently offered options assume a simple Black-Scholes setup and, in particular, deterministic or even constant interest rates.We present a framework in which participating life insurance contracts including predominant kinds of guarantees and options can be valuated and analyzed in a stochastic interest rate environment. In particular, the different option elements can be priced and analyzed separately. We use Monte Carlo and discretization methods to derive the respective values.The sensitivity of the contract and guarantee values with respect to multiple parameters is studied using the bonus distribution schemes as introduced in Bauer et al. (2006). Surprisingly, even though the value of the contract as a whole is only moderately affected by the stochasticity of the short rate of interest, the value of the different embedded options is altered considerably in comparison to the value under constant interest rates. Furthermore, using a simplified asset portfolio and empirical parameter estimations, we show that the proportion of stock within the insurer's asset portfolio substantially affects the value of the contract.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

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Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment

Zaglauer

Bauer

2008

Insurance: Mathematics and Economics

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Participating Life Insurance Contracts under Risk Based Solvency Frameworks: How to Increase Capital Efficiency by Product Design

Reuß

Ruß²,

Wieland³

2015

Innovations in Quantitative Risk Management

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Traditional participating life insurance contracts with year-to-year (cliquet-style) guarantees have come under pressure in the current situation of low interest rates and volatile capital markets, in particular when priced in a market consistent valuation framework. In addition, such guarantees lead to rather high capital requirements under risk-based solvency frameworks such as Solvency II or the Swiss Solvency Test (SST). We introduce several alternative product designs and analyze their impact on the insurer's financial situation. We also introduce a measure for Capital Efficiency that considers both, profits and capital requirements, and compare the results of the innovative products to the traditional product design with respect to Capital Efficiency in a market consistent valuation model.

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A market-consistent framework for the fair evaluation of insurance contracts under Solvency II

Gambaro

Casalini²,

Fusai

et al. 2019

Decisions Econ Finan

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The entry into force of the Solvency II regulatory regime is pushing insurance companies in engaging into market consistence evaluation of their balance sheet, including the financial options and guarantees embedded in life with-profit funds. The robustness of these valuations is crucial for insurance companies in order to produce sound estimates and good risk management strategies, in particular for liability driven products such as with-profit saving and pension funds. This paper introduces a simulation approach for Monte Carlo evaluation of insurance assets and liabilities, which is more suitable for risk management of liability driven products than common approaches generally adopted by insurance companies, in particular with respect to the assessment of valuation risk.

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Risk-neutral valuation of participating life insurance contracts

Cited by 77 publications

References 11 publications

Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment

Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment

Participating Life Insurance Contracts under Risk Based Solvency Frameworks: How to Increase Capital Efficiency by Product Design

A market-consistent framework for the fair evaluation of insurance contracts under Solvency II

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