A Market-Based Approach to Pricing With-Profits Guarantees

Hare, D.J.P.; Dickson, J.A.; McDade, P.A.P.; Morrison, D.; Priestley, R.P.; Wilson, G.J.

doi:10.1017/s1357321700001975

Cited by 8 publications

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“…At the same time as the theoretical developments, regulatory and consumer pressures constrained actuarial discretion in pensions and insurance (Needleman & Roff, 1995;Shelley et al, 2002) so that payouts from long-term funds were more mechanically linked to investment performance. There followed a series of papers applying option pricing theories (also called market-consistent valuation) to many areas of actuarial work: pensions (Exley et al, 1997;Head et al, 2000;Chapman et al, 2001), life insurance (Hare et al, 2000;Hibbert & Turnbull, 2003;Sheldon & Smith, 2004) and general insurance (Cumberworth et al, 2000;Dreksler et al, 2015).…”

Section: What a Difference 20 Years Makesmentioning

confidence: 99%

British Actuarial Journal celebrates its 20^th anniversary

2015

Br. Actuar. J.

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Section: What a Difference 20 Years Makesmentioning

confidence: 99%

British Actuarial Journal celebrates its 20^th anniversary

2015

Br. Actuar. J.

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“…2.1.3 We refer the reader to Altmann & Vanderhoof (1998), van Bezooyen et al (2000, Grosen & Jorgensen (2000), Hare et al (1999), Hairs et al (2001), Jarvis et al (2001), Abbink & Saker (2002), Blight et al (2003), Dullaway & Needleman (2004), Kipling & Moran (2003), Muir & Market Consistent Valuation of Life Assurance Business Waller (2003) for the by now well-rehearsed list of influences leading insurers towards market consistent valuations of assets and liabilities, and for the various uses to which these valuations may be put.…”

Section: Three Motivationsmentioning

confidence: 99%

Market Consistent Valuation of Life Assurance Business

Sheldon¹,

Smith²

2004

Br. Actuar. J.

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In recent years there has been a trend towards market consistent valuation in those institutions for which actuaries have responsibilities. The larger United Kingdom with-profits insurance companies are now preparing realistic balance sheets, both for internal purposes and also at the request of the Financial Services Authority. International accounting standards have been moving to a fair value approach. Pension fund accounting under FRS 17 has also moved in this direction.In this paper we examine the reasons for the adoption of market consistent valuation and discuss some of the commercial implications and corporate valuation. We consider the methods and assumptions which can be used to develop market consistent valuations of cash flows typically encountered in the liabilities of financial institutions, together with some of the problems inherent in the calibration of models used for the valuation of these cash flows. The volatility assumption is crucial to the valuation of options and guarantees, and we discuss the relationship between historical and implied volatility.While most insurance companies initially adopted formulae to value their with-profits guarantees, several offices are now using a Monte Carlo simulation approach for their realistic balance sheets. The Monte Carlo approach enables allowance to be made for management discretion in bonus and investment policy, as well as policyholder actions. However, in many cases it is possible to develop analytical formulae for cash flows approximating those payable under insurance contracts.The valuation formulae have implications for the hedging of embedded guarantees. The authors discuss the construction of hedges for financial risks in with-profits funds, the separate perspectives of policyholders and shareholders, possible funds in which to hold hedging instruments, limitations of capital market hedging tools and the effect of taxation on hedge effectiveness.

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“…2.3.11 The method suggested by Wilkie (1978), and followed by Hare et al (2000), is to assume that the shareholders wish to earn on their invested funds an extra h per annum more than they will earn from the normal investment proceeds. The value of h might be say 0.01 or 0.02, equivalent to an extra 1% or 2% return.…”

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Reserving, Pricing and Hedging For Policies with Guaranteed Annuity Options

Wilkie¹,

Waters²,

Yang³

2003

Br. Actuar. J.

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In this paper we consider reserving and pricing methodologies for a pensions-type contract with a simple form of guaranteed annuity option. We consider only unit-linked contracts, but our methodologies and, to some extent, our numerical results would apply also to with-profits contracts.The Report of the Annuity Guarantees Working Party (Bolton et al., 1997), presented the results of a very interesting survey, as at the end of 1996, of life assurance companies offering guaranteed annuity options. There was no consensus at that time among the companies on how to reserve for such options. The Report discussed several approaches to reserving, but concluded that it was unable to recommend a single approach. This paper is an attempt to fill that gap.We investigate two approaches to reserving and pricing. In the first sections of the paper we consider quantile, and conditional tail expectation, reserves. The methodology we adopt here is very close to that proposed by the Maturity Guarantees Working Party in its Report to the profession (Ford et al., 1980). We show how these policies could have been reserved for in 1985, and what would have been the outcome of using the proposed method.In a later section we consider the feasibility of using option pricing methodology to dynamically hedge a guaranteed annuity option. It is shown that this is possible within the context of the model we propose, but we submit that, in practical terms, dynamic hedging is not a complete solution to the problem since suitable tradeable assets do not in practice exist.Finally, we describe several enhancements to our models and methodology, which would make them even more realistic, though generally they would have the effect of increasing the required contingency reserves keywords

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A Market-Based Approach to Pricing With-Profits Guarantees

Abstract: 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.

Cited by 8 publications

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British Actuarial Journal celebrates its 20^th anniversary

British Actuarial Journal celebrates its 20^th anniversary

Market Consistent Valuation of Life Assurance Business

Reserving, Pricing and Hedging For Policies with Guaranteed Annuity Options

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A Market-Based Approach to Pricing With-Profits Guarantees

Abstract: 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.

Cited by 8 publications

References 0 publications

British Actuarial Journal celebrates its 20th anniversary

British Actuarial Journal celebrates its 20th anniversary

Market Consistent Valuation of Life Assurance Business

Reserving, Pricing and Hedging For Policies with Guaranteed Annuity Options

Contact Info

Product

Resources

About

British Actuarial Journal celebrates its 20^th anniversary

British Actuarial Journal celebrates its 20^th anniversary