An option pricing approach to bonus policy. In memoriam Anthony P. Limb

Abstract

In this paper I discuss a simple application of option pricing theory to bonuses on with-profits life assurance policies. The approach is a new one and I have been able to make only an introductory exploration of its possible applications. Nevertheless it seems to me to give actuaries some sort of a handle for gripping the rather intractable problem of the relationship between reversionary bonus, terminal bonus and the proceeds of comparable unit-linked policies. I look at the problem very much from the policyholder's side, and I am not concerned here with aspects of valuation or solvency. These require further investigation.