A measure to analyse the interaction of contracts in a heterogeneous life insurance portfolio (joint work with Stefan Graf and Alexander Kling)
Because of the long-term nature of life insurance policies including interest rate guarantees and the current low interest rate environment, the fair valuation of insurance contracts became of particular interest recently. Fair valuation is often discussed on a single contract basis or from the viewpoint of a homogenous portfolio, i.e. a portfolio with identical policies. However, insurance portfolios are heterogeneous, i.e. consist of many different contracts. These contracts interact, e.g. because they share reserves, profits and the risk of default of the insurance company. In this paper, we introduce a methodology how interactions between heterogeneous insurance portfolios can be measured and provide some sample analyses showing how different contracts may subsidize each other. This methodology also allows for a check, whether a contract is fair calculated in a heterogeneous portfolio.