Fair Valuation of Participating Life Insurance Contracts with Jump Risk

The purpose of this article is to value participating life insurance contracts when the linked portfolio is modeled by a jump-diffusion. More precisely, this process has a Brownian component and a compound Poisson one, where the jump size is driven by a double exponential distribution. Specifically...

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Bibliographic Details
Published in:The Geneva risk and insurance review 2008-12, Vol.33 (2), p.106-136
Main Authors: Le Courtois, Olivier, Quittard-Pinon, François
Format: Article
Language:English
Subjects:
Accounting
Bankruptcy
Credit insurance
Economics and Finance
Fair market value
Fair value
Finance
Financial instruments
Financial leverage
Financial Services
Hypotheses
Insurance
Insurance contracts
Insurance policies
Insurance regulation
International finance
International organizations
Investment risk
Kurtosis
Liability insurance
Life insurance
Policyholders
Risk Management
Securities markets
Skewness
Solvency
Studies
Valuation
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Summary:The purpose of this article is to value participating life insurance contracts when the linked portfolio is modeled by a jump-diffusion. More precisely, this process has a Brownian component and a compound Poisson one, where the jump size is driven by a double exponential distribution. Specifically here, the bankruptcy risk of the insurance company is considered. Thus, market and credit risks are taken into account. A quasi-closed-form formula is obtained in fair value for the price of the considered life insurance contract. This allows us to investigate the impact of strategic parameters as well as structural ones, as is shown in the numerical section of this paper. In particular, we study the impact on the contract of the volatility, jump intensity, jump asymmetry, company leverage, guaranteed rate, participation rate and level of the default barrier, and comment on how they are likely to increase the probability of early default of the issuer.
ISSN:1554-964X
1554-9658
DOI:10.1057/grir.2008.11