The Impact of Implicit Options in Life Insurance Contracts : Systematization and Overview

Proper pricing and risk assessment of implicit options in life insurance contractshas gained substantial attention in recent years, which is reflected in a growing literaturein this field. The purpose of this article is to outline the significance of implicitoptions in life insurance. Toward this aim, we first compare the most popularcontract types in the United States and Europe. Next, we provide a comprehensiveoverview and detailed description of implicit options contained in these contracts.To illustrate the impact of these options, we present contract design, valuationmethods, and main results of several recent articles in this field. Our analysis indicatesthat a broad application of fair valuation of life insurance liabilities may leadto a trend away from traditional contract design and toward new products that areof a more transparent modular form. These new contracts will contain fewer basicguarantees and a set of additional, adequately priced options.