Margrabe option and life insurance with participation
DEVOLDER P.; AZIZIEH C.
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Abstract
Life insurance rating is mainly based on two principles: discounting effect and mortality risk. The traditional way to price these contracts was to use a constant discount rate and a fixed life table. Nevertheless, evidences show that neither financial conditions nor mortality figures remain constant. If financial uncertainty is nowadays fully accepted and modelled quite a lot, longevity risk must be also considered and is of first importance for actuaries, especially in fair valuation of life insurance with profit. The purpose of this paper is to present a model taking into account simultaneously financial and longevity risks and to apply it to the valuation of life insurance contracts with a participation scheme based on the global profit of the insurer. In particular, we show that a life insurance contract with global participation can be seen as a portfolio of zero coupons and Margrabe options.
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