Summary

In this chapter we introduce equity-linked insurance contracts. We explore deterministic emerging costs techniques with examples, and demonstrate that deterministic profit testing cannot adequately model these contracts.

We introduce stochastic cash flow analysis, which gives a fuller picture of the characteristics of the equity-linked cash flows, particularly when guarantees are present, and we demonstrate how stochastic cash flow analysis can be used to determine better contract design.

Finally we discuss the use of quantile and conditional tail expectation reserves for equity-linked insurance.

Equity-linked insurance

In Chapter 1 we described some modern insurance contracts where the main purpose of the contract is investment. These contracts include some life contingent guarantees, predominantly as a way of distinguishing them from pure investment products.

These contracts are called unit-linked insurance in the UK and parts of Europe, variable annuities in the USA (though there is often no actual annuity component) and segregated funds in Canada. All fall under the generic title of equity-linked insurance. The basic premise of these contracts is that a policyholder pays a single or regular premium which, after deducting expenses, is invested on the policyholder's behalf. The accumulating premiums form the policyholder's fund. Regular management charges are deducted from the fund by the insurer and paid into the insurer's fund to cover expenses and insurance charges.