On the risk-neutral valuation of life insurance contracts with numerical methods in view. Working paper

In recent years, market-consistent valuation approaches have gained an increasing importance for insur-ance companies. This has triggered an increasing interest among practitioners and academics, and a number of studies on such valuation approaches have been published. However, despite the fact that many models are structurally similar, no generic modeling setup has been proposed so far. In this paper, we present such a generic model for the valuation of life insurance contracts and embedded options. Furthermore, we describe various numerical valuation approaches within our generic setup. We particularly focus on contracts containing early exercise features since these present (numerically) challenging valuation problems. Based on an example of participating life insurance contracts, we illustrate the different approaches and compare their efficiency in a simple and a generalized Black-Scholes setup, respectively. Moreover, we study the impact of the considered early exercise feature on our example contract and analyze the influ-ence of model risk by additionally introducing an exponential Lévy model