Asset Management and Surplus Distribution Strategies in Life Insurance : An Examination with Respect to Risk Pricing and Risk Measurement

In this paper, we investigate the impact of different asset management and surplus distributionstrategies in life insurance on risk-neutral pricing and shortfall risk. In general,these feedback mechanisms affect the contract’s payoff and hence directly influence pricingand risk measurement. To isolate the effect of such strategies on shortfall risk, wecalibrate contract parameters so that the compared contracts have the same market valueand same default-value-to-liability ratio. This way, the fair valuation method is extendedsince, in addition to the contract’s market value, the default put option value is fixed. Wethen compare shortfall probability and expected shortfall and show the substantial impactof different management mechanisms acting on the asset and liability side.