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Equity-linked life insurance - a model with stochastic interest rates

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Author Info
Nielsen, J. Aase
Klaus Sandmann

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Abstract

Assuming constant interest rates Brennan and Schwartz (1976, 1979) obtained the rational insurance premium on an equity-linked insurance contract through the application of the theory of contingent claims pricing. Further considerations with deterministic interest rates have been discussed in Aase and Persson (1992) and in Persson (1993). Analysing the single premium case Bacinello and Ortu (1993b) allow for the short term interest rate to develop in accordance to an Ornstein-Uhlenbeck process. In a paper from 1994 they consider extensions to both the single and the periodic premium model. This paper presents a model similar to the one by Bacinello and Ortu (1994) for the periodic premium case with a stochastic interest rate dynamic. It is shown that the insurance contract includes an Asian-like option contract. Sufficient conditions on the guaranteed amount for the existence of a solution are derived. As no closed form solution will be obtained, we discuss different numerical approaches and apply Monte Carlo simulations with a variance reduction technique.

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Publisher Info
Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 291.

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Date of creation: Jan 1995
Date of revision: Mar 1995
Handle: RePEc:bon:bonsfb:291

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de/index.php?id=517

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Related research
Keywords: Asian option; forward risk adjusted measure; Monte Carlo simulations;

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Find related papers by JEL classification:
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

References listed on IDEAS
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  1. Kemna, A. G. Z. & Vorst, A. C. F., 1990. "A pricing method for options based on average asset values," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 113-129, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Antje Mahayni & Erik Schlögl, 2003. "The Risk Management of Minimum Return Guarantees," Bonn Econ Discussion Papers bgse18_2003, University of Bonn, Germany. [Downloadable!]
    Other versions:
  2. Masahiko Egami & Hideki Iwaki, 2007. "An optimal life insurance policy in the investment-consumption problem in an incomplete market," Quantitative Finance Papers 0801.0195, arXiv.org. [Downloadable!]
  3. Grosen, Anders & Jensen, Bjarke & Løchte Jørgensen, Peter, 2001. "A Finite Difference Approach to the Valuation of Path Dependent Life Insurance Liabilities," Finance Working Papers 01-5, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
  4. Nielsen, J. A. & K. Sandmann, 1995. "The Pricing of Asian Options under Stochastic Interest Rates," Discussion Paper Serie B 323, University of Bonn, Germany, revised Dec 1995. [Downloadable!]
  5. 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!]
    Other versions:
  6. Nielsen, J. Aase & Klaus Sandmann, 1995. "Uniqueness of the Fair Premium for Equity-Linked Life Insurance Contracts," Discussion Paper Serie B 327, University of Bonn, Germany, revised Mar 1996. [Downloadable!]
    Other versions:
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