Scenario-based life insurance prognoses in a multi-state Markov model

Traditional life insurance and pension prognoses from the policyholder’s perspective do not illustrate financial riskiness or the effect of financial guarantees adequately. We address this issue by introducing stochastic scenarios. Our model applies to participating life insurance as well as unit-linked insurance, and it is formulated in a general multi-state Markov model. In addition to illustrating financial riskiness, our model allows for tailor-made best-estimate prognoses in any financial market. We illustrate the use of our model by conducting scenario analysis based on Monte Carlo simulation, but the model applies to scenarios in general and to worst-case and best-estimate scenarios in particular. Our paper offers moderate mathematical complexity and a common framework for the valuation of life insurance payments across product types, and it fills the existing gap in the literature with respect to prognoses from the policyholder’s perspective.