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A joint valuation of premium payment and surrender options in participating life insurance contracts

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  • Schmeiser, H.
  • Wagner, J.

Abstract

In addition to an interest rate guarantee and annual surplus participation, life insurance contracts typically embed the right to stop premium payments during the term of the contract (paid-up option), to resume payments later (resumption option), or to terminate the contract early (surrender option). Terminal guarantees are on benefits payable upon death, survival and surrender. The latter are adapted after exercising the options. A model framework including these features and an algorithm to jointly value the premium payment and surrender options is presented. In a first step, the standard principles of risk-neutral evaluation are applied and the policyholder is assumed to use an economically rational exercise strategy. In a second step, option value sensitivity on different contract parameters, benefit adaptation mechanisms, and exercise behavior is analyzed numerically. The two latter are the main drivers for the option value.

Suggested Citation

  • Schmeiser, H. & Wagner, J., 2011. "A joint valuation of premium payment and surrender options in participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 580-596.
    • Handle: RePEc:eee:insuma:v:49:y:2011:i:3:p:580-596
    DOI: 10.1016/j.insmatheco.2011.08.004
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    Cited by:

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    More about this item

    Keywords

    Participating life insurance contracts; Embedded options; Paid-up and resumption; Surrender; Monte Carlo method; Optimal stopping problem;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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