In this paper we assess the joint impact of biometric and financial risk on the market valuation of life insurance liabilities. We consider a stylized, contingent claim based model of a life insurance company issuing participating contracts and subject to default risk,
as pioneered by Briys and de Varenne (1994, 1997) build on their model by explicitly introducing biometric risk and its components, namely diversifiable and systematic risk. The contracts considered include pure endowments, deferred whole life annuities
and guaranteed annuity options. Our results stress the predominance of systematic over
diversifiable risk in determining fair participation rates. We investigate the interaction
of contract design, market regimes and mortality scenarios, and show that, particularly
for lifelong benefits, usually offered participation rates may not be sustainable even under moderate longevity improvements.