Profit Testing of Profit Sharing Life Insurance Policies in the Presence of Extreme Risks
Working Paper
28 Pages Posted: 10 Jun 2018 Last revised: 22 Mar 2023
Date Written: May 25, 2018
Abstract
This paper examines the profit testing of life insurance companies that issue participating policies, type B and type A universal life policies, and variable annuities with guaranteed minimum maturity and death benefits, when investment returns are stochastic and modeled by normal or variance gamma distributions. We rely on the stochastic profit testing techniques introduced in Dickson, Hardy, and Waters (2013) to examine the influence of the models' parameters and of the models themselves on the profit testing indicators. We show that the variance gamma model results in more conservative predictions - in a smaller expected net present value and in larger risk indicators for the net present value - than the normal model for participating policies and universal life policies. The paper also shows that variable annuities with guaranteed minimum maturity benefits are little sensitive to the choice of model. For variable annuities with guaranteed minimum death benefits, we show that the expected net present value is higher but that the risk indicators built on the net present value remain higher in the variance gamma model.
Keywords: Profit Testing, Participating Contract, Universal Life Contract, Variable Annuities With Guarantees, Gaussian and Non-Gaussian Assumptions, Variance Gamma Process
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