Life Insurance Liabilities at Market Value

Anders Grosen () and Peter Jørgensen ()

No 01-4, Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This paper takes a contingent claim approach to the market valuation of equity and liabilities in life insurance companies. A model is presented which explicitly takes into account the facts that the holders of life insurance contracts (LICs) have the first claim on the company’s assets whereas equityholders have limited liability, that interest rate guarantees are common elements of LICs, and that LICs according to the so-called contribution principle are entitled to receive a fair share of any investment surplus. Furthermore, a regulatory mechanism in the form of an intervention rule is built into the model. This mechanism is shown to significantly reduce the insolvency risk of the issued contracts and it implies that the various claims on the company’s assets become more exotic and obtain barrier option properties. Closed valuation formulas are nevertheless derived. Finally, some representative numerical examples illustrate how the model can be used to establish the set of initially fair contracts and to determine the market values of contracts after their inception.

Keywords: Life insurance (search for similar items in EconPapers)
Pages: 43 pages
Date: 2001-05-01
References: Add references at CitEc
Citations: View citations in EconPapers (38)

Downloads: (external link)
http://www.hha.dk/fin/finance/Research/D01_4.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhb:aarfin:2001_004

Access Statistics for this paper

More papers in Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Helle Vinbaek Stenholt ( this e-mail address is bad, please contact ).