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Abstract

The aim of this paper is to provide an assessment of alternative frameworks for the fair valuation of life insurance contracts with a predominant financial component, in terms of impact on the market consistent price of the contracts, the options embedded therein, and the capital requirements for the insurer. In particular, we model the dynamics of the log-returns of the reference fund using the so-called Merton process (Merton, 1976), which is given by the sum of an arithmetic Brownian motion and a compound Poisson process, and the Variance Gamma (VG) process introduced by Madan and Seneta (1990), and further refined by Madan and Milne (1991) and Madan et al. (1998). We conclude that, although the choice of the market model does not affect significantly the market consistent price of the overall benefit due at maturity, the consequences of a model misspecification on the capital requirements are quite severe.

Publication Type:	Article
Additional Information:	This is an Accepted Manuscript of an article published by Taylor & Francis in QUANTITATIVE FINANCE on 12 Oct 2009, available online: http://wwww.tandfonline.com/10.1080/14697680802452068
Publisher Keywords:	fair value, incomplete markets, L´evy processes, Monte Carlo simulation, participating contracts, solvency requirements
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Actuarial Science & Insurance > Actuarial Research Reports
SWORD Depositor:	Symplectic Administrator

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