Model for calculation of liability value arising from life insurance

Pavel Finfrle, République Tchèque

In this paper we propose the fair value model based on the risk neutral calculations methodology corresponding to the hypothetical secondary market of policies. Similarly to the real insurers way of thinking and despite of the most theoretical approaches we do not consider policyholders being financially rational and therefore we do not use option pricing models to evaluate policyholders and embedded options (typically the surrender and paid-up option). After general introduction of the approach, we show possible way of liability value calculation using Gaussian short term interest rates model and incorporating different investment strategies and profit-sharing systems.
Date: 29 May - Time: 14:30 to 16:00 - Room: 341
Theme: 1.B. Solvency measurements and asset-liability management