Pricing Participating Policies Using Optimization Techniques

This paper considers the pricing of a life insurance participating policy based on the approach of maximization of the profit of the insurance company. In this type of policies a minimum interest is credited to the policyholder at regular intervals and according to the performance of a particular investment portfolio during the year, an additional interest is credited. Furthermore, the policyholder is given the right to sell back the contract to the insurance company before maturity and receive a surrender value. First we derive a formula to calculate the expected payments of the policy using the notion of fair valuation and the approach proposed by Bacinello (2001). Then, we formalize our optimization model intended to decide the premium, the minimum guarantee and participation rate. Finally, we carry out computational experiments applying the soft approach for hard optimization models put forward by Xu (2006).