Life insurance guarantees undervalued, posing risk to insurance companies' balance sheets.
The article discusses how to value the minimum guaranteed return in life insurance contracts. The researchers developed a model to price these guarantees, taking into account the unpredictable nature of interest rates. They found that the premiums for life insurance contracts can be calculated using market prices of bonds and a risk-adjusted probability measure. This approach differs from traditional methods and helps insurers evaluate their obligations more accurately.