On pricing and reserving with-profits life insurance contracts

As a first approximation, asset and liability management issues faced by life insurance companies originate from the sale of with-profits contracts. These contracts are bond-type products with several rate guarantees and other interestsensitive embedded options. Benefits paid out to policyholders mostly depend on the investment performance of a given asset portfolio in which premiums are invested. Thus, guarantees and options granted to policyholders may become effective when the investment performance of the asset portfolio is poor. Issuing a with-profits contract is therefore not equivalent to issuing plain-vanilla debt. The purpose of this paper is to value with-profits liabilities in a consistent option-pricing framework and to develop efficient asset or liability strategies to manage profitability and variability of shareholder value.