Computation of bonus in multi-state life insurance

TL;DR

This paper develops numerical methods to compute bonus payments in multi-state with-profit life insurance, integrating financial risk simulation with traditional insurance risk models, especially when bonus decisions depend solely on financial risk.

Contribution

It introduces efficient numerical procedures for bonus valuation that combine financial risk simulation with classic insurance risk methods, focusing on cases where bonus decisions depend only on financial risk.

Findings

Methods successfully illustrated with a numerical example.

Efficient combination of financial and insurance risk simulations.

Applicable to bonus schemes based solely on financial risk.

Abstract

We consider computation of market values of bonus payments in multi-state with-profit life insurance. The bonus scheme consists of additional benefits bought according to a dividend strategy that depends on the past realization of financial risk, the current individual insurance risk, the number of additional benefits currently held, and so-called portfolio-wide means describing the shape of the insurance business. We formulate numerical procedures that efficiently combine simulation of financial risk with classic methods for the outstanding insurance risk. Special attention is given to the case where the number of additional benefits bought only depends on the financial risk. Methods and results are illustrated via a numerical example.