Market-Consistent Valuation of Long-Term Insurance Contracts - Valuation Framework and Application to German Private Health Insurance

In this paper we derive a market-consistent value for long-term insurance contracts, with a focus on long-term health insurance contracts as found, e.g., in the German private health insurance industry. To this end, we rst set up a health insurance company model and, second, conduct a simulation study to calculate the present value of future pro ts and the time value of nancial options and guarantees from a portfolio of private health insurance policies. Our analysis quanti es the impact of investment results and underwriting surpluses on shareholder pro ts with respect to pro t sharing rules and premium adjustment mechanisms. In contrast to the valuation of life insurance contracts with similar calculation techniques the results indicate that the time value of nancial options and guarantees of German private health insurance contracts is not substantial in typical parameter settings.