LIFE-INSURANCE IN A CONTINGENT CLAIM FRAMEWORK - PRICING AND REGULATORY IMPLICATIONS

In this paper we develop a contingent claim model to evaluate the equity and liabilities of a life insurance company. The limited liability of shareholders is explicitly modelled. We focus on a specific type of life insurance policy-namely, the profit-sharing policy. In this policy, the policy-holder is entitled to a guaranteed interest rate and a percentage of the company's yearly financial revenues. The implicit equilibrium interest rate and profit-sharing ratio are derived and analyzed. We finally discuss regulatory measures frequently encountered in the life insurance business such as rate ceilings, capital ratios, and asset restrictions.