Advanced Search
MyIDEAS: Login to save this article or follow this journal

Valuation of life insurance surrender and exchange options

Contents:

Author Info

  • Nordahl, Helge A.

Abstract

In this paper I analyze two American-type options related to life and pension insurance contract. I use Monte Carlo simulations combined with the Longstaff and Schwartz approach for the valuation of American options to find the value of a typical surrender option. I find that the values may be much lower than previously indicated. This reduction of value is due to a different treatment of bonuses, limiting the customers' ability to forecast the return of their policies. The numerical results show that the value may be higher than the corresponding surrender option.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V8N-4R2H7V6-2/2/4f8e805dc4d5f942e958231532491f97
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 42 (2008)
Issue (Month): 3 (June)
Pages: 909-919

as in new window
Handle: RePEc:eee:insuma:v:42:y:2008:i:3:p:909-919

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
  2. Cummins, J. David & Miltersen, Kristian R. & Persson, Svein-Arne, 2004. "International Comparison of Interest Rate Guarantees in Life Insurance," Discussion Papers 2004/18, Department of Business and Management Science, Norwegian School of Economics.
  3. Miltersen, Kristian R. & Persson, Svein-Arne, 1999. "Pricing rate of return guarantees in a Heath-Jarrow-Morton framework," Insurance: Mathematics and Economics, Elsevier, vol. 25(3), pages 307-325, December.
  4. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  5. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
  6. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
  7. Guillen, Montserrat & Jorgensen, Peter Lochte & Nielsen, Jens Perch, 2006. "Return smoothing mechanisms in life and pension insurance: Path-dependent contingent claims," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 229-252, April.
  8. Philip Protter & Emmanuelle Clément & Damien Lamberton, 2002. "An analysis of a least squares regression method for American option pricing," Finance and Stochastics, Springer, vol. 6(4), pages 449-471.
  9. Grosen, Anders & Lochte Jorgensen, Peter, 2000. "Fair valuation of life insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies," Insurance: Mathematics and Economics, Elsevier, vol. 26(1), pages 37-57, February.
  10. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  11. Laura Ballotta & Steven Haberman & Nan Wang, 2006. "Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 97-121.
  12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  13. Eric Briys & Fran�ois De Varenne, 1994. "Life Insurance in a Contingent Claim Framework: Pricing and Regulatory Implications," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 19(1), pages 53-72, June.
  14. Lars Stentoft, 2004. "Convergence of the Least Squares Monte Carlo Approach to American Option Valuation," Management Science, INFORMS, vol. 50(9), pages 1193-1203, September.
  15. Bauer, Daniel & Kiesel, Rudiger & Kling, Alexander & Ru[ss], Jochen, 2006. "Risk-neutral valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 171-183, October.
  16. George Marsaglia & Wai Wan Tsang, . "The Ziggurat Method for Generating Random Variables," Journal of Statistical Software, American Statistical Association, vol. 5(i08).
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. M. Martin Boyer & Lars Peter Stentoft, 2012. "If we can simulate it, we can insure it: An application to longevity risk management," CIRANO Working Papers 2012s-08, CIRANO.
  2. Martin Eling & Michael Kochanski, 2013. "Research on lapse in life insurance: what has been done and what needs to be done?," Journal of Risk Finance, Emerald Group Publishing, vol. 14(4), pages 392-413, July.
  3. Su, Karen C., 2010. "The conversion option in life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 437-442, June.
  4. Kochanski, Michael, 2010. "Solvency capital requirement for German unit-linked insurance products," German Risk and Insurance Review (GRIR), University of Cologne, Department of Risk Management and Insurance, vol. 6(2), pages 33-70.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:42:y:2008:i:3:p:909-919. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.