infonet-economy

Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. The purpose of this article is to outline the significance of implicit options in life insurance. Toward this aim, we first compare the most popular contract types in the United States and Europe. Next, we provide a comprehensive overview and detailed description of implicit options contained in these contracts. To illustrate the impact of these options, we present contract design, valuation methods, and main results of several recent articles in this field. Our analysis indicates that a broad application of fair valuation of life insurance liabilities may lead to a trend away from traditional contract design and toward new products that are of a more transparent modular form. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.