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Uniqueness of the Fair Premium for Equity-Linked Life Insurance Contracts

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Author Info
J. Aase Nielsen () (Department of Operations Research, University of Aarhus, Bldg. 530, Ny Munkegade DK-8000 Aarhus C, Denmark.)
Klaus Sandmann () (Department of Statistics, Rheinische Friedrich-Wilhelms-Universit&aauml;t Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany.)

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Abstract

An equity-linked life insurance contract combines an endowment life insurance and an investment strategy with a minimum guarantee. The benefit of this contract is determined by the guaranteed amount plus a bonus equal to a call on the portfolio. This bonus is similar to an Asian option. This article analyzes the relationship between the periodic insurance premium and its proportional share invested into the portfolio. For a general model of the financial risks we show the existence and uniqueness of an insurance premium. Furthermore the premium is strictly increasing and convex as a function of the share invested. The Geneva Papers on Risk and Insurance Theory (1996) 21, 65–102. doi:10.1007/BF00949051

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Article provided by Palgrave Macmillan Journals in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 21 (1996)
Issue (Month): 1 (June)
Pages: 65-102
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Handle: RePEc:pal:genrir:v:21:y:1996:i:1:p:65-102

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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.:
  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. [Downloadable!] (restricted)
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  2. Jamshidian, Farshid, 1989. " An Exact Bond Option Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 205-09, March. [Downloadable!] (restricted)
  3. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 377-389, September. [Downloadable!]
  4. Vorst, Ton, 1992. "Prices and hedge ratios of average exchange rate options," International Review of Financial Analysis, Elsevier, vol. 1(3), pages 179-193. [Downloadable!] (restricted)
  5. Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-29, December. [Downloadable!] (restricted)
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  1. An Chen, 2005. "Loss Analysis of a Life Insurance Company Applying Discrete-time Risk-minimizing Hedging Strategies," Bonn Econ Discussion Papers bgse19_2005, University of Bonn, Germany. [Downloadable!]
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