Financial Valuation of a New Generation Participating Life-Insurance Contract

In this paper we analyze a typical “new generation” participating life-insurance contract: the single-premium whole life participating policy with zero technical rate and low-level surrender penalty. In such a contract there is no “traditional” mortality risk and the financial content is prevailing, since the benefits are yearly readjusted according to the return of the fund where the reserve is invested, with a yearly minimum guarantee. This kind of policy is widely sold by Italian companies in these years and can be seen as an open-term investment in the fund, protected by the minimum guarantee. The aim of this paper is to perform mark-to-market valuation of this contract in order to obtain the stochastic reserve, the fair value of the embedded option and the value of business in-force, the “technical” component of the embedded value.