Valuing the profit share in participating pure-endowment policies with return of premiums

Solvency II together with changes in the accounting standards caused the valuation of future profit sharing in life insurance policies to become a problem with increasing significance and complexity. This happens because, apart from the structure of each contract itself and the associated profit sharing rules, the amount of profit to policy holders is a variable that depends on many other economic and financial factors. In this paper we value the profit share in with-profit and return of premiums pure-endowment policies, a particular case of practical interest not found in the literature. The need to follow Solvency II makes the valuation a difficult task and the major problem is to estimate all and each one of the cash flows generated by such contracts, till the maturity of the whole portfolio. A stochastic approach and a modified version of the Wilkie Model are the tools selected to perform the estimation. © 2013, DAV / DGVFM.