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Fair Valuation of Various Participation Schemes in Life Insurance

Published online by Cambridge University Press:  17 April 2015

Pierre Devolder  and
Inmaculada Domínguez-Fabián
Pierre Devolder
Affiliation:
Institut des Sciences Actuarielles, Université Catholique de Louvain, 6, rue des Wallons, 1348 Louvain-la-Neuve, Belgium, E-mail: devolder@fin.ucl.ac.be
Inmaculada Domínguez-Fabián
Affiliation:
Department of Financial Economy, University of Extremadura, Spain, E-mail: idomingu@guadiana.unex.es
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Abstract

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Fair valuation is becoming a major concern for actuaries, especially in the perspective of IAS norms. One of the key aspects in this context is the simultaneous analysis of assets and liabilities in any sound actuarial valuation. The aim of this paper is to illustrate these concepts, by comparing three common ways of giving bonus in life insurance with profit: reversionary, cash or terminal. For each participation scheme, we compute the fair value of the contract taking into account liability parameters (guaranteed interest rate and participation level) as well as asset parameters (market conditions and investment strategy). We find some equilibrium conditions between all those coefficients and compare, from an analytical and numerical point of view, the systems of bonus. Developments are made first in the classical binomial model and then extended in a Black and Scholes economy.

Keywords

Fair valueparticipation schemeasset and liability management
Type
Workshop
Information
ASTIN Bulletin: The Journal of the IAA , Volume 35 , Issue 1 , May 2005 , pp. 275 - 297
Copyright
Copyright © ASTIN Bulletin 2005

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