Equity-Indexed Life Insurance: Pricing and Reserving Using the Principle of Equivalent Utility

Abstract

The author applies the principle of equivalent utility to price and reserve equity-indexed life insurance. Young and Zariphopoulou (2002a, b) extended this principle to price insurance products in a dynamic framework. However, in those papers, the insurance risks were independent of the risky asset in the financial market. By contrast, the death benefit for equity-indexed life insurance is a function of a risky asset; therefore, this paper further extends the principle of equivalent utility. In a second extension, the author applies the principle of equivalent utility to calculate reserves, as introduced by Gerber (1976). In a related paper, Moore and Young (2002) price equity-indexed pure endowments, the building blocks of equity-indexed life annuities.