Valuation of the surrender option in unit-linked life insurance policies in a non-rational behaviour framework

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Valuation of the surrender option in unit-linked life insurance policies in a non-rational behaviour framework

Author Info

Luca Anzilli ()
Luigi De Cesare ()

Abstract

In this article we propose a discrete time-based model for the evaluation of the surrender option implicit in a portfolio of single premium unit-linked life policies. We presume that the policyholders do not act rationally. Their behaviour is linked to the credibility of the insurance companies, to the analysis of the economic convenience of a rating agency, as well as to their personal needs for surrenders. In this paper we investigate the effects of a company's advertising campaign on the price of surrender options. The model was numerically implemented using the Cox et al. [Cox, J.C., Ross, S.A., Rubinstein, M., 1979. Option Pricing: A Simplified Approach. Journal of Financial Economics 7, 229-263] binomial model.

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Paper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 20-2007.

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Length: 20 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:ufg:qdsems:20-2007

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-02-16 (All new papers)
NEP-IAS-2008-02-16 (Insurance Economics)

References listed on IDEAS
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Tanskanen, Antti Juho & Lukkarinen, Jani, 2003. "Fair valuation of path-dependent participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 33(3), pages 595-609, December. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Shen, Weixi & Xu, Huiping, 2005. "The valuation of unit-linked policies with or without surrender options," Insurance: Mathematics and Economics, Elsevier, vol. 36(1), pages 79-92, February. [Downloadable!] (restricted)

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