Journal
INSURANCE MATHEMATICS & ECONOMICS
Volume 42, Issue 1, Pages 419-433Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.insmatheco.2007.04.007
Keywords
embedded options; interest rate guarantees; model risk; participating contracts; risk-neutral valuation; unit-linked contracts
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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 Levy 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. (C) 2007 Elsevier B.V. All rights reserved.
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