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Fair Valuation of Participating Life Insurance Contracts with Jump Risk

Author

Listed:
  • Olivier Le Courtois

    (Department of Economics and Finance, EM Lyon Business School, 23 Avenue Guy de Collongue, Ecully 69134, France.)

  • François Quittard-Pinon

    ([1] aDepartment of Economics and Finance, EM Lyon Business School, 23 Avenue Guy de Collongue, Ecully 69134, France.
    [2] b110, Rue Sully, Lyon 69006, France.)

Abstract

The purpose of this article is to value participating life insurance contracts when the linked portfolio is modeled by a jump-diffusion. More precisely, this process has a Brownian component and a compound Poisson one, where the jump size is driven by a double exponential distribution. Specifically here, the bankruptcy risk of the insurance company is considered. Thus, market and credit risks are taken into account. A quasi-closed-form formula is obtained in fair value for the price of the considered life insurance contract. This allows us to investigate the impact of strategic parameters as well as structural ones, as is shown in the numerical section of this paper. In particular, we study the impact on the contract of the volatility, jump intensity, jump asymmetry, company leverage, guaranteed rate, participation rate and level of the default barrier, and comment on how they are likely to increase the probability of early default of the issuer. The Geneva Risk and Insurance Review (2008) 33, 106–136. doi:10.1057/grir.2008.11

Suggested Citation

  • Olivier Le Courtois & François Quittard-Pinon, 2008. "Fair Valuation of Participating Life Insurance Contracts with Jump Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 33(2), pages 106-136, December.
    • Handle: RePEc:pal:genrir:v:33:y:2008:i:2:p:106-136
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    References listed on IDEAS

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    Cited by:

    1. Olivier Le Courtois & François Quittard-Pinon & Xiaoshan Su, 2020. "Pricing and hedging defaultable participating contracts with regime switching and jump risk," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 303-339, June.

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