Life Insurance in a Contingent Claim Framework: Pricing and Regulatory Implications

In this paper we develop a contingent claim model to evaluate the equity and liabilities of a life insurance company. The limited liability of shareholders is explicitly modelled. We focus on a specific type of life insurance policy–namely, the profit-sharing policy. In this policy, the policyholder is entitled to a guaranteed interest rate and a percentage of the company's yearly financial revenues. The implicit equilibrium interest rate and profit-sharing ratio are derived and analyzed. We finally discuss regulatory measures frequently encountered in the life insurance business such as rate ceilings, capital ratios, and asset restrictions. The Geneva Papers on Risk and Insurance Theory (1994) 19, 53–72. doi:10.1007/BF01112014