Guarantees in with-profit and unitized with-profit life insurance contracts: Fair valuation problem in presence of the default option

Ballotta, L., Haberman, S. & Wang, N. (2006). Guarantees in with-profit and unitized with-profit life insurance contracts: Fair valuation problem in presence of the default option. Journal of Risk and Insurance, 73(1), pp. 97-121. doi: 10.1111/j.1539-6975.2006.00167.x

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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.

Item Type: Article
Additional Information: This is the accepted version of the following article: Ballotta, L, Haberman, S & Wang, N (0001). Guarantees in with-profit and unitized with-profit life insurance contracts: Fair valuation problem in presence of the default option. JOURNAL OF RISK AND INSURANCE, 73(1), pp. 97-121, which has been published in final form at DOI 10.1111/j.1539-6975.2006.00167.x
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/5814

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