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 evaluates fixed premium endowment participating contracts, where the annual premium remains constant while the benefits increase stochastically, assuming a realistic financial model. We extend both the variable benefits life insurance approach of Bowers et al. (1997) and the compound reversionary bonus mechanism presented in Booth et al. (2020) and Bacinello (2003) to a stochastic financial market (including stochastic interest rates) and stochastic mortality framework. The contracts along with associated participation bonus mechanisms are compared and analyzed using Monte Carlo simulations. Such experiments highlight the need to reflect potential future benefit increases exceeding the guaranteed rate for an accurate measurement of liabilities and risk