Fair valuation of insurance contracts under Lévy process specifications
The valuation of options embedded in insurance contracts using concepts from financial mathematics (in particular, from option pricing theory), typically referred to as fair valuation, has recently attracted considerable interest in academia as well as among practitioners. The aim of this article is to investigate the valuation of participating and unit-linked life insurance contracts, which are characterized by embedded rate guarantees and bonus distribution rules. In contrast to the existing literature, our approach models the dynamics of the reference portfolio by means of an exponential Lévy process. Our analysis sheds light on the impact of the dynamics of the reference portfolio on the fair contract value for several popular types of insurance policies. Moreover, it helps to assess the potential risk arising from misspecification of the stochastic process driving the reference portfolio.
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- 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.
- 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.
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