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Life Insurance Liabilities at Market Value

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Author Info

  • Grosen, Anders

    ()
    (Department of Finance, Aarhus School of Business)

  • Løchte Jørgensen, Peter

    (Department of Management)

Abstract

This paper takes a contingent claim approach to the market valuation of equity and liabilities in life insurance companies. A model is presented which explicitly takes into account the facts that the holders of life insurance contracts (LICs) have the first claim on the company’s assets whereas equityholders have limited liability, that interest rate guarantees are common elements of LICs, and that LICs according to the so-called contribution principle are entitled to receive a fair share of any investment surplus. Furthermore, a regulatory mechanism in the form of an intervention rule is built into the model. This mechanism is shown to significantly reduce the insolvency risk of the issued contracts and it implies that the various claims on the company’s assets become more exotic and obtain barrier option properties. Closed valuation formulas are nevertheless derived. Finally, some representative numerical examples illustrate how the model can be used to establish the set of initially fair contracts and to determine the market values of contracts after their inception.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 01-4.

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Length: 43 pages
Date of creation: 01 May 2001
Date of revision:
Handle: RePEc:hhb:aarfin:2001_004

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Related research

Keywords: Life insurance;

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Cited by:
  1. Antje Mahayni & Erik Schlögl, 2003. "The Risk Management of Minimum Return Guarantees," Research Paper Series 102, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Zeljko Sain & Jasmina Selimovic, 2009. "Challenges in Insurance Industry," Interdisciplinary Management Research, Faculty of Economics in Osijek, Croatia, vol. 5, pages 471-479.
  3. Antoon Pelsser, 2002. "Pricing and Hedging Guaranteed Annuity Options via Static Option Replication," Tinbergen Institute Discussion Papers 02-037/2, Tinbergen Institute.
  4. An Chen & Xia Su, 2009. "Knightian uncertainty and insurance regulation decision," Decisions in Economics and Finance, Springer, vol. 32(1), pages 13-33, May.
  5. An Chen, 2005. "Loss Analysis of a Life Insurance Company Applying Discrete-time Risk-minimizing Hedging Strategies," Bonn Econ Discussion Papers bgse19_2005, University of Bonn, Germany.
  6. Tak Siu & John Lau & Hailiang Yang, 2007. "On Valuing Participating Life Insurance Contracts with Conditional Heteroscedasticity," Asia-Pacific Financial Markets, Springer, vol. 14(3), pages 255-275, September.
  7. Eling, Martin & Holder, Stefan, 2012. "The Value of Interest Rate Guarantees in Participating Life insurance Contracts: Status Quo and Alternative Product Design," Working Papers on Finance 1221, University of St. Gallen, School of Finance.
  8. Dirk Broeders & An Chen & Birgit Koos, 2014. "Utility-equivalence of pension security mechanisms," DNB Working Papers 414, Netherlands Central Bank, Research Department.
  9. Kevin Fergusson & Eckhard Platen, 2013. "Real World Pricing of Long Term Cash-Linked Annuities and Equity-Linked Annuities with Cash-Linked Guarantees," Research Paper Series 338, Quantitative Finance Research Centre, University of Technology, Sydney.
  10. Kling, Alexander & Richter, Andreas & Ruß, Jochen, 2006. "The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees," Discussion Papers in Business Administration 1220, University of Munich, Munich School of Management.
  11. Dirk Broeders & An Chen & David Rijsbergen, 2011. "Valuation of Liabilities in Hybrid Pension Plans," DNB Working Papers 326, Netherlands Central Bank, Research Department.
  12. Eckhard Platen, 2009. "Real World Pricing of Long Term Contracts," Research Paper Series 262, Quantitative Finance Research Centre, University of Technology, Sydney.

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