Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-10T16:51:26.296Z Has data issue: false hasContentIssue false
  • English
  • Français

A Market-Based Approach to Pricing With-Profits Guarantees

Published online by Cambridge University Press:  10 June 2011

D.J.P. Hare ,
J.A. Dickson ,
P.A.P. McDade ,
D. Morrison ,
R.P. Priestley  and
G.J. Wilson
D.J.P. Hare
Affiliation:
Standard Life Assurance Company, 30 Lothian Road, Edinburgh, EH1 2DH, U.K. Tel: +44(0)131-245-0632; Fax: +44(0)131-245-9620; E-mail: david_hare@standardlife.com
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper addresses one of the fundamental issues faced by offices in the transacting of with-profits business, namely, the provision of equity-related performance along with maturity guarantees that increase over the lifetime of the policy. The approach commonly followed of using capital to cover the office's investment mismatch risk is considered from an individual policy viewpoint, and, through stochastic modelling, the degree of security represented by different reserve levels identified. An alternative approach using derivatives to provide similar levels of security is then presented and the range of policy proceeds resulting from the two methods compared. While it is recognised that the latter approach may have limited application in practice, the ideas presented could form the basis of a new approach to pricing guarantees under with-profits business that would be consistent with the pricing of current derivative-backed guaranteed products.

Keywords

With-ProfitsGuaranteesPolicyholders' Reasonable ExpectationsCapitalRiskDerivativesStatutory ReservesStochastic ModellingLow InflationBonus RatesAsset Shares
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 6 , Issue 1 , 01 June 2000 , pp. 143 - 213
Copyright
Copyright © Institute and Faculty of Actuaries 2000

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Boyle, P. P. & Hardy, M. R. (1996). Reserving for maturity guarantees. University of Waterloo, Institute of Insurance and Pension Research, Research Report 96–18.Google Scholar
Forfar, D. O., Milne, R. J. H., Muirhead, J. R., Paul, D. R. L., Robertson, A. J., Robertson, C. M., Scott, H. J. A., & Spence, H. G. (1989). Bonus rates, valuation and solvency during the transition between higher and lower investment returns. T.F.A. 40, 490–585.Google Scholar
Geoghegan, T. J., Clarkson, R. S., Feldman, K. S., Green, S. J., Kitts, A., Lavecky, J. P., Ross, F. J. M., Smith, W. J. & Toutounchi, A. (1992). Report on the Wilkie stochastic investment model. J.I.A. 119, 173–228.Google Scholar
Hairs, C. J., Arnold, M., Gustar, A. J., Hare, D. J. P., Needleman, P. D., Tuley, P. J. & Webber, J. M. (1999). The closed fund alternative. B.A.J. 5, 699–761.Google Scholar
Hardy, M. R. & Rae, R. A. (1998). Financing investment freedom. Paper presented to the Staple Inn Actuarial Society.Google Scholar
MacDonald, A.S. (1995). Life assurance regulation and solvency I: how effective is a solvency valuation? Unpublished extract from Ph.D. thesis.Google Scholar
Ranson, R. H. & Headdon, C. P. (1989). With profits without mystery. J.I.A. 116, 301–345.Google Scholar
Maturity Guarantees Working Party (1980). Report of the Maturity Guarantees Working Party. J.I.A. 107, 101–212.Google Scholar
Tillinghast (1997). Asset share survey.Google Scholar
Wilkie, A. D. (1978). Maturity (and other) guarantees under unit linked policies. T.F.A. 36, 27–41.Google Scholar
Wilkie, A. D. (1986). A stochastic investment model for actuarial use. T.F.A. 39, 341–403.Google Scholar
Wilkie, A. D. (1987). An option pricing approach to bonus policy. J.I.A. 114, 21–90.Google Scholar
Wilkie, A. D. (1995). More on a stochastic asset model for actuarial use. B.A.J. 1, 777–964.Google Scholar

Reference

Bachelier, L. (1900). Theory of speculation. Doctoral thesis translated and reprinted in The random character of stock market prices, edited by Cootner, Paul. M.I.T. Press, Cambridge, Mass., 1964.Google Scholar