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

Author

Listed:
  • Laura Ballotta
  • Steven Haberman
  • Nan Wang

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. Copyright The Journal of Risk and Insurance, 2006.

Suggested Citation

  • Laura Ballotta & Steven Haberman & Nan Wang, 2006. "Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 97-121.
  • Handle: RePEc:bla:jrinsu:v:73:y:2006:i:1:p:97-121
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    Citations

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    Cited by:

    1. Fabrice Borel-Mathurin & Pierre-Emmanuel Darpeix & Quentin Guibert & Stéphane Loisel, 2015. "Main Determinants of Profit Sharing Policy in the French Life Insurance Industry," PSE Working Papers halshs-01165475, HAL.
    2. Eckert, Johanna & Gatzert, Nadine & Martin, Michael, 2016. "Valuation and risk assessment of participating life insurance in the presence of credit risk," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 382-393.
    3. Bernard Carole & Le Courtois Olivier, 2012. "Asset Risk Management of Participating Contracts," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(2), pages 1-23, June.
    4. Bohnert, Alexander & Gatzert, Nadine, 2012. "Analyzing surplus appropriation schemes in participating life insurance from the insurer’s and the policyholder’s perspective," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 64-78.
    5. Schmeiser, H. & Wagner, J., 2011. "A joint valuation of premium payment and surrender options in participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 580-596.
    6. Broeders, Dirk & Chen, An & Koos, Birgit, 2011. "A utility-based comparison of pension funds and life insurance companies under regulatory constraints," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 1-10, July.
    7. Vittas, Dimitri, 2011. "The mechanics and regulation of variable payout annuities," Policy Research Working Paper Series 5762, The World Bank.
    8. repec:wsi:ijtafx:v:09:y:2006:i:04:n:s0219024906003688 is not listed on IDEAS
    9. Nordahl, Helge A., 2008. "Valuation of life insurance surrender and exchange options," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 909-919, June.
    10. Dirk Broeders & An Chen & David Rijsbergen, 2013. "Valuation of liabilities in hybrid pension plans," Applied Financial Economics, Taylor & Francis Journals, vol. 23(15), pages 1215-1229, August.
    11. Ballotta, Laura, 2005. "A Lévy process-based framework for the fair valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 173-196, October.
    12. Kassberger, Stefan & Kiesel, Rüdiger & Liebmann, Thomas, 2008. "Fair valuation of insurance contracts under Lévy process specifications," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 419-433, February.
    13. Nadine Gatzert & Hato Schmeiser, 2008. "Assessing the Risk Potential of Premium Payment Options in Participating Life Insurance Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(3), pages 691-712.
    14. Martin Eling & Dieter Kiesenbauer, 2012. "Does Surplus Participation Reflect Market Discipline? An Analysis of the German Life Insurance Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(3), pages 159-185, December.
    15. Gatzert, Nadine, 2008. "Asset management and surplus distribution strategies in life insurance: An examination with respect to risk pricing and risk measurement," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 839-849, April.
    16. Fabrice Borel-Mathurin & Pierre-Emmanuel Darpeix & Quentin Guibert & Stéphane Loisel, 2015. "Main Determinants of Profit Sharing Policy in the French Life Insurance Industry," Working Papers halshs-01165475, HAL.
    17. Dirk Broeders & An Chen & Birgit Koos, 2014. "Utility-equivalence of pension security mechanisms," DNB Working Papers 414, Netherlands Central Bank, Research Department.
    18. Gerstner, Thomas & Griebel, Michael & Holtz, Markus & Goschnick, Ralf & Haep, Marcus, 2008. "A general asset-liability management model for the efficient simulation of portfolios of life insurance policies," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 704-716, April.
    19. F. Borel-Mathurin & P.-E. Darpeix & Q. Guibert & S. Loisel, 2015. "Main determinants of profit sharing policy in the French life insurance industry," Débats économiques et financiers 17, Banque de France.
    20. Gerstner, Thomas & Griebel, Michael & Holtz, Markus, 2009. "Efficient deterministic numerical simulation of stochastic asset-liability management models in life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 44(3), pages 434-446, June.
    21. Floryszczak, Anthony & Le Courtois, Olivier & Majri, Mohamed, 2016. "Inside the Solvency 2 Black Box: Net Asset Values and Solvency Capital Requirements with a least-squares Monte-Carlo approach," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 15-26.
    22. Ballotta, Laura & Esposito, Giorgia & Haberman, Steven, 2006. "The IASB Insurance Project for life insurance contracts: Impact on reserving methods and solvency requirements," Insurance: Mathematics and Economics, Elsevier, vol. 39(3), pages 356-375, December.

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