Analysis of Participating Life Insurance Contracts: A Unification Approach
Journal
The Journal of Risk and Insurance
ISSN
0022-4367
Type
journal article
Date Issued
2007-09-01
Author(s)
Abstract
Fair pricing of embedded options in life insurance contracts is usually conducted by using the appropriate concept of risk-neutral valuation. This concept assumes a perfect hedging strategy, which insurance companies can hardly pursue in practice. In this paper, we extend
the risk-neutral valuation concept with a risk measurement approach. We accomplish this by first calibrating contract parameters that lead to the same market value using risk-neutral valuation. We then measure the resulting risk assuming that insurers do not follow perfect hedging strategies. As the relevant risk measure, we use lower partial moments, comparing shortfall probability, expected shortfall, and shortfall variance. We show that even when contracts have the same market value, the insurance company's risk can vary widely, a finding
that allows us to identify key risk drivers for participating life insurance contracts.
the risk-neutral valuation concept with a risk measurement approach. We accomplish this by first calibrating contract parameters that lead to the same market value using risk-neutral valuation. We then measure the resulting risk assuming that insurers do not follow perfect hedging strategies. As the relevant risk measure, we use lower partial moments, comparing shortfall probability, expected shortfall, and shortfall variance. We show that even when contracts have the same market value, the insurance company's risk can vary widely, a finding
that allows us to identify key risk drivers for participating life insurance contracts.
Language
English
Keywords
Participating Life Insurance
Fair Valuation
Lower Partial Moments
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Blackwell
Publisher place
Malden, Mass.
Volume
74
Number
3
Start page
547
End page
570
Pages
24
Subject(s)
Division(s)
Eprints ID
29846