Evaluation of participating endowment life insurance policies in a stochastic environment

Participating life insurance contracts are policies that provide dividends (participation bonuses) based on the insurer’s financial performance. While these products are popular, there exists a gap in the literature for the analysis of these contracts under a stochastic setting. This paper fills this gap by proposing methods to (i) determine performance bonuses, (ii) compute the fair premium of the contract, and (iii) perform risk measurements for participating contracts in a realistic stochastic environment. The specific case of a fixed premium endowment participating contract, where the annual premium remains constant while benefits increase stochastically, is considered. We extend both the variable benefits life insurance approach of Bowers et al. [ 9 ] and the compound reversionary bonus mechanism presented in Booth et al. [ 8 ] and Bacinello [ 2 ] to a stochastic financial market (including stochastic interest rates) and stochastic mortality framework. Monte Carlo simulations provide insight about the sensitivity of premiums to contract specification and the evolution over time of both benefits and risks faced by the insurer.