The Prometeia Model for Managing Insurance Policies with Guarantees

Insurance products become increasingly more innovative in order to face competitive pressures. Insurance policies today come with guarantees on the minimum rate of return, bonus provisions, and surrender options. These features make them attractive for investors who seek not only insurance but also investment vehicles. However, the new policies are much more complex to price and fund than traditional insurance products. In this chapter we discuss the development of a scenario-based optimization model for asset and liability management for the participating policies with guarantees and bonus provisions offered by Italian insurers. The changing landscape of the financial services in Italy sets the backdrop for the development of this system which was the result of a multi-year collaborative effort between academic researchers, the research staff at Prometeia in Bologna, and end-users from diverse Italian insurers. The model is presented, its key features are discussed in detail, and several extensions are briefly introduced. The resulting system allows the analysis of the tradeoffs facing an insurance firm in structuring its policies as well as the choices in covering their cost. It is applied to the analysis of policies offered by Italian insurance firms. While the optimized model results are in general agreement with current industry practices, inefficiencies are still identified and potential improvements are suggested. Extensive numerical experiments provide significant insights on features of the participating guaranteed policies.