Implicit Options in Life Insurance: Valuation and Risk Management
Gatzert N, Schmeiser H (2006)
Publication Language: English
Publication Type: Journal article
Publication year: 2006
Journal
Publisher: Springer Verlag
Book Volume: 95
Pages Range: 111-128
DOI: 10.1007/BF03353443
Abstract
Participating life insurance contracts typically contain various types of implicit options. These implicit options can be very valuable and can thus represent a significant risk to insurance companies if they practice insufficient risk management. Options become especially risky through interaction with other options included in the contracts, which makes their evaluation even more complex. This article provides a comprehensive overview and classification of implicit options in participating life insurance contracts and discusses the relevant literature. It points out the potential problems particularly associated with the valuation of rights to early exercise due to policyholder exercise behavior. The risk potential of the interaction of implicit options is illustrated with numerical examples by means of a life insurance contract that includes common implicit options, i.e., a guaranteed interest rate, stochastic annual surplus participation, and paid-up and resumption options. Valuation is conducted using risk-neutral valuation, a concept that implicitly assumes the implementation of risk management measures such as hedging strategies.
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Switzerland (CH)How to cite
APA:
Gatzert, N., & Schmeiser, H. (2006). Implicit Options in Life Insurance: Valuation and Risk Management. Zeitschrift für die gesamte Versicherungswissenschaft, 95, 111-128. https://dx.doi.org/10.1007/BF03353443
MLA:
Gatzert, Nadine, and Hato Schmeiser. "Implicit Options in Life Insurance: Valuation and Risk Management." Zeitschrift für die gesamte Versicherungswissenschaft 95 (2006): 111-128.
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