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On the pricing of single premium variable annuities with periodic fees and periodic cost of insurance using option pricing techniques

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  • Thomas Poufinas

Abstract

The pricing of a series of products that combine insurance with investments, known as variable annuities, is considered. Given that there is a single premium instalment, then the death benefit at the time of death is equal to the maximum between the fund value and the sum assured. We have discussed in the past the problem in the case that there is a single premium instalment and the cost of insurance is collected at the beginning. We now move to examine the case that management fees need to be paid periodically via the cancellation of units and study the calculation of the charge that needs to be made by the insurer. We do not use standard actuarial techniques, but rather realise that the risk borne by the insurer resembles to the payoff of an option. We attempt to follow option valuation techniques in discrete time to find the insurance premium.

Suggested Citation

  • Thomas Poufinas, 2011. "On the pricing of single premium variable annuities with periodic fees and periodic cost of insurance using option pricing techniques," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 2(3), pages 180-194.
    • Handle: RePEc:ids:ijfmkd:v:2:y:2011:i:3:p:180-194
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    References listed on IDEAS

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    1. Aase Nielsen, J. & Sandmann, Klaus, 1995. "Equity-linked life insurance: A model with stochastic interest rates," Insurance: Mathematics and Economics, Elsevier, vol. 16(3), pages 225-253, July.
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    Cited by:

    1. Thomas Poufinas, 2015. "On the pricing of regular premium variable annuities using options," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 4(1), pages 54-77.

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