Option Valuation in Life Insurance

Inhaltsverzeichnis (Table of Contents)

• Introduction.
• The impact of the German Tax Raises on the Importance of Options
• A. The Role of Bonus Payments in Capital Forming Life Insurance Contracts
• B. A Model of Bonus Payments to attract New Customers.
• 1. Legal Framework
• 2. Model
• C. The influence of the change in law on the profit sharing in 2005.
• D. Numerical results….......
• Implicit Options in Life Insurance...
• E. Options in Financial Theory.
• F. Implicit options..........\li>
• G. Classification of options in life insurance according to the risk type
• 1. Risk-free Options
• 2. Actuarial Risks.
• 3. Financial Risks
• H. Classification of the Most Common Options ....
• 1. Risk-free Options
• 2. Actuarial Options
• 3. Financial Options
• Basic Models of Option Valuation.
• I. Equity Option Models
• 1. Black-Scholes Model
• 2. Binomial Tree Model of Cox, Ross and Rubinstein
• 3. Risk neutral valuation ….………………..\li>
• J. Interest Rate Option Models..\n.
• K. The model.....
• 1. Hull-White Model
• L. Models of the Valuation of the American Options in Life Insurance
• 1. Tribinomial tree for the interest rate and asset process.
• Valuation of the Surrender Option in Capital Forming Life Insurance
• 2. Numerical Results
• M. Grosen-Jorgensen Approach.
• N. Longstaff and Schwartz Approach.

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis examines the impact of tax changes on the valuation of options embedded in capital forming life insurance contracts in Germany. It explores the role of bonus payments in attracting new customers and the effect of the tax changes on their future availability. The study investigates how implicit options in life insurance contracts, including surrender options, are classified and valued using different models. This research seeks to understand the implications of these changes for the insurance industry and the need for accurate valuation of these options to ensure solvency.

• The role of bonus payments in capital forming life insurance contracts.
• The impact of tax changes on bonus payments and customer attraction.
• The definition and classification of implicit options in life insurance.
• The application of option valuation models, including Black-Scholes, binomial tree, and trinomial tree models.
• The valuation of surrender options in capital forming life insurance.

Zusammenfassung der Kapitel (Chapter Summaries)

The introductory chapter outlines the changing landscape of capital forming life insurance in Germany, highlighting the impact of the tax changes on bonus payments. The focus is on how these changes necessitate the use of other strategies, such as implicit options, to attract new customers. It presents a model for understanding the relationship between tax changes and bonus payments.

The second chapter explores the concept of implicit options in life insurance, defining and classifying them according to their risk types. It provides a detailed overview of the most common options found in the German market.

The third chapter delves into the methodology of option valuation, explaining the use of equity option models and interest rate option models. It highlights the importance of tree models, such as the binomial tree model and the trinomial tree model, for option valuation.

The fourth chapter focuses on the valuation of non-European options, specifically the surrender option, in life insurance contracts. The chapter discusses the Grosen-Jorgensen approach and the Longstaff and Schwartz approach to valuing such options. The chapter's analysis includes numerical results to illustrate the application of these models.

Schlüsselwörter (Keywords)

The central keywords and concepts of this work include profit sharing, bonus payments, implicit options, option valuation, tax changes, life insurance, capital forming life insurance, surrender option, Black-Scholes model, binomial tree model, trinomial tree model, Grosen-Jorgensen approach, and Longstaff and Schwartz approach. These terms represent the core topics explored in the study, encompassing both the practical and theoretical aspects of option valuation in life insurance.