Profit margin in Life Insurance

Specialeforsvar ved Ulla Bergstedt

Titel: Profit Margin in Life Insurance

Abstract:  Profit Margin is a new accounting notion introduced in the latest Danish legislation as a part of the European Solvency II. In the thesis 'Profit Margin in Life Insurance' the notion of Profit Margin in relation to life insurance is examined from three different perspectives: Legislative, insurance mathematical and numerical. Profit Margin is an account in the balance scheme and expresses the expected value of future profit paid to the owners of the company. The bonus potentials provide capital for the Profit Margin account and Profit Margin consists of two parts. One part is included in the retrospective provision and the other part is included in the undistributed reserve. The Profit Margin account provides capital for the annual cash flow of profit. We model profit as an expense paid to the owners of the insurance company and include these profit payments in the traditional reserves and the market reserves. In the context of a 'With Profit' insurance we consider both a deter-ministic market and a Black-Scholes market. We propose specific models for the profit payments, derive explicit expressions for Profit Margin and calculate Profit Margin numeri-cally in the deterministic market. A one-year calculation model widely used in the Danish insurance industry is described and in this context the annual calculation of a fair risk payment in the Black-Scholes market is calculated 

Vejleder: Mogens Steffensen
Censor:   Jesper Olesen, Danica Pension