Valuation of the surrender option in unit-linked life insurance policies in a non-rational behaviour framework
AbstractIn 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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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 20-2007.
Length: 20 pages
Date of creation: Oct 2007
Date of revision:
Surrender option; Unit-linked life insurance; Non-rational behaviour.;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - 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
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- Grosen, Anders & Lochte Jorgensen, Peter, 2000.
"Fair valuation of life insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies,"
Insurance: Mathematics and Economics,
Elsevier, vol. 26(1), pages 37-57, February.
- Peter L›chte J›rgensen & Anders Grosen, . "Fair Valuation of Life Insurance Liabilities: The Impact of Interest Rate Guarantees, Surrender Options, and Bonus Policies," Management Working Papers 1999-1, School of Economics and Management, University of Aarhus.
- 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.
- 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.
- 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.
- repec:zbw:grirej:68727 is not listed on IDEAS
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