Download Implicit Embedded Options in Life Insurance Contracts: A by Nils Rüfenacht (auth.) PDF

By Nils Rüfenacht (auth.)

This booklet offers a market-consistent valuation framework for implicit embedded suggestions in lifestyles assurance contracts. This framework is used to accomplish an empirical research in keeping with greater than 110,000 real and in-force lifestyles policies and with a spotlight at the modeling of rates of interest. Its effects are the reply to the valuable query posed within the goals: What price do the embedded strategies and promises thought of have? this query is spoke back either totally and relative to the present coverage reserves, from the point of view of the insurer, the policyholder and the shareholder respectively

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This requires realistic modelling of both policyholder and insurer behaviour. (. . ) SAA (2006) does not further explain what realistic modelling of policyholder behaviour means exactly. For the European Solvency II regime we find quite a similar instruction in Article 79 of the directive EC 138 (2009) that I have cited in Sect. 2 already. Assumptions made with respect to the likelihood that policyholders will exercise embedded options shall take account, either explicitly or implicitly, of the impact that future changes in financial and non-financial conditions may have on the exercise of those options.

As one possible area of application the determination of model parameters characterising initially fair premiums is suggested. Another application possibility is the fair market valuation of a company’s equity and liabilities after the inception of the policies taking into account changes in market conditions. In the concluding section the authors make mention of one important issue for further research. 10 To get a real practical model more flexibility towards contractual specifications is absolutely necessary.

The model developed therein shall be their starting point. Mainly, the current paper presents two improvements. On the one hand they enhance the numerical procedure to calculate a policy value by reducing the dimensionality of the underlying algorithm. The authors denote that issue as the core contribution. On the other hand the former model becomes more realistic as mortality is taken into account. 30 2 Theoretical Considerations Regarding Embedded Options In the concluding section they confirm that the enhancements worked out in the current paper support the results created in the former paper and are indeed an improvement.

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