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Pricing and capital requirements for with profit contracts : modelling considerations

[journal article]

Ballotta, Laura

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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 embedded options, 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 noticeable.
Classification Economic Sectors; Economic Statistics, Econometrics, Business Informatics
Method theory application
Document language English
Publication Year 2009
Page/Pages p. 803-817
Journal Quantitative Finance, 9 (2009) 7
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)