The text of this paper, together with the abstract of the discussion held by the Faculty of Actuaries on 15 November 1999, are printed in British Actuarial Journal, 6, I, 143-213.
This paper addresses one of the fundamental issues faced by offices in the transacting of withprofits 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.
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