Valuing embedded options and guarantees in life insurance products
Insurance products are often characterized by embedded options and guarantees contractually promised to the policy holder. The value of these options and guarantees depends heavily on the prevailing economic conditions.
Examples are the interest rate in case of profit-sharing options, or the return on investments in case of Unit-Linked products with a return guarantee. The value of embedded options and guarantees is an integral part of the market value of insurance liabilities. A correct and consistent valuation is therefore essential. Not only from the perspective of good risk management, but also for internal and supervisory reporting. While determining the current value of embedded options and guarantees is usually not a problem, obtaining their future market value as needed in forward-looking applications like ORSA and ALM is much more complicated. The main problem is that one needs to assess the option value for each year in each scenario, resulting in extremely lengthy calculation times. Ortec Finance offers a solution to this problem through our Option Interpolation Model (OIM).