Fair valuation of path-dependent participating life insurance contracts

Fair valuation of insurance contracts, and of options embedded in them, is an important, incompletely understood issue. With the coming IAS insurance contract standard, the valuation of liabilities in life insurance is due to a drastic change. We present a computationally tractable model for fair valuation of participating life insurance contracts with given, almost arbitrary bonus policies. Unlike traditional valuation methods, our model captures several essential features of participating life insurance contracts, such as fair values of interest rate guarantees and of various bonus policies. In the model, fair value of life insurance contracts is understood as the arbitrage free price in the presence of liquid markets for liabilities. In addition to numerical results, the model gives solutions in closed form.