Bilateral Trade, Openness and Asset Holdings
AbstractWe study the valuation of unit-linked life insurance contracts with surrender guarantees. Instead of solving an optimal stopping problem, we propose a more realistic approach accounting for policyholders’ rationality in exercising their surrender option. The valuation is conducted at the portfolio level by assuming the surrender intensity to be bounded from below and from above. The lower bound corresponds to purely exogenous surrender and the upper bound represents the limited rationality of the policyholders. The valuation problem is formulated by a valuation PDE and solved with the finite difference method. We show that the rationality of the policyholders has a significant effect on average contract value and hence on the fair contract design. We also present the separating boundary between purely exogenous surrender and endogenous surrender. This provides implications on the predicted surrender activity of the policyholders.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse22_2010.
Date of creation: Dec 2010
Date of revision:
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unit-linked life insurance contracts; surrender guarantee; limited rationality; fair contract analysis;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-23 (All new papers)
- NEP-IAS-2010-12-23 (Insurance Economics)
- NEP-INT-2010-12-23 (International Trade)
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