Pricing Equity-Linked Life Insurance Products in the Nigerian Market

This study examines the actuarial pricing of equity-linked life insurance products in the Nigerian market, with particular attention to the embedded options and guarantees that make these products both attractive to consumers and financially complex for insurers. Equity-linked products, which combine life insurance protection with investment returns linked to equity market performance, have gained interest among Nigeria's growing middle class seeking wealth accumulation alongside protection. However, the embedded guarantee features typical of these products, including minimum guaranteed returns and capital protection floors, create option-like liabilities that require sophisticated pricing approaches. This study uses a quantitative design, applying stochastic investment return models calibrated to the Nigerian Exchange Group All Share Index for the period 2014 to 2023. Black-Scholes-Merton and Monte Carlo simulation frameworks are used to value embedded guarantee options under different market scenarios. Pricing results are compared against premium rates published by three Nigerian life insurers offering unit-linked products. Findings reveal that current market premium rates are inadequate to fund both the pure insurance benefit and the embedded guarantee under adverse equity market scenarios. The probability of under-reserve on guarantee liability exceeds 35 percent under the 10th percentile equity return scenario. The study concludes that equity-linked product guarantees are materially underpriced in the Nigerian market. It recommends that NAICOM develop specific solvency capital requirements for embedded options in equity-linked products, aligned with international practice.

Keywords: equity-linked insurance, embedded options, stochastic pricing, life insurance, Nigerian Exchange Group.