A Framework to Charge for Unit-Linked Contracts When Considering Guaranteed Risk

Risk management for investment guarantees with unit-linked contracts is very critical for the insurer. This paper proposes a framework to charge for guaranteed risk when the insurer reserves for the guaranteed risk. This framework can facilitate the calculation of risk reserves and charge for the investment guarantees. In this framework the charge is determined by two criteria of meeting the insurance company’s target internal rate of return and simultaneously the reserving standard. The framework is built on the stochastic cash-flow analysis. For illustrative purposes, we set up quantile reserves as the actuarial reserving standard in our framework. In this framework, the procedure to work out the charges is in reverse. In our numerical illustration, we investigate a unit-linked policy with maturity guarantees. Our framework would also apply to other types of contacts, guarantees and reserving standard.