Implicit Options in Life Insurance: Valuation and Risk Management
Journal
Zeitschrift für die gesamte Versicherungswissenschaft
ISSN
0044-2585
ISSN-Digital
1865-9748
Type
journal article
Date Issued
2006-01-01
Author(s)
Abstract
Participating life insurance contracts typically contain various types of implicit options. These implicit options can be very valuable and can thus represent a significant risk to insurance companies if they practice insufficient risk management. Options become especially risky through interaction with other options included in the contracts, which makes their evaluation even more complex. This article provides a comprehensive overview and classification of implicit options in participating life insurance contracts and discusses the relevant literature. It points out the potential problems particularly associated with the valuation of rights to early exercise due to policyholder exercise behavior. The risk potential of the interaction of implicit options is illustrated with numerical examples by means of a life insurance contract that includes common implicit options, i.e., a guaranteed interest rate, stochastic annual surplus participation, and paid-up and resumption options. Valuation is conducted using risk-neutral valuation, a concept that implicitly assumes the implementation of risk management measures such as hedging strategies.
Language
English
Keywords
Participating Life Insurance Contracts
Fair Valuation
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Duncker & Humblot
Publisher place
Berlin
Volume
95
Number
1
Start page
111
End page
128
Pages
18
Subject(s)
Division(s)
Eprints ID
32212