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Analytical valuation of periodical premiums for equity-linked policies with minimum guarantee

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  • Costabile, M.

Abstract

We consider the problem of computing fair periodical premiums of equity-linked policies with a minimum guarantee. The policy payoff at maturity may be decomposed into two components: a fixed part representing the guaranteed payment and a European call option written on the equity reference fund. The deemed periodical contributions into the reference fund may be considered as negative dividends paid by the reference fund and the fair value of the policy may be derived through a closed-form formula by mimicking the valuation of an option written on an underlying security that pays fixed dividends. Numerical results show that the proposed model computes accurate values.

Suggested Citation

  • Costabile, M., 2013. "Analytical valuation of periodical premiums for equity-linked policies with minimum guarantee," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 597-600.
    • Handle: RePEc:eee:insuma:v:53:y:2013:i:3:p:597-600
    DOI: 10.1016/j.insmatheco.2013.08.007
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    References listed on IDEAS

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    1. Bacinello, Anna Rita & Ortu, Fulvio, 1993. "Pricing equity-linked life insurance with endogenous minimum guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 12(3), pages 245-257, June.
    2. Brennan, Michael J. & Schwartz, Eduardo S., 1976. "The pricing of equity-linked life insurance policies with an asset value guarantee," Journal of Financial Economics, Elsevier, vol. 3(3), pages 195-213, June.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Bacinello, Anna Rita & Ortu, Fulvio, 1993. "Pricing equity-linked life insurance with endogenous minimum guarantees : A corrigendum," Insurance: Mathematics and Economics, Elsevier, vol. 13(3), pages 303-304, December.
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    Cited by:

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    2. Kim, Seong-Tae & Kim, Hyun-Gyoon & Kim, Jeong-Hoon, 2021. "ELS pricing and hedging in a fractional Brownian motion environment," Chaos, Solitons & Fractals, Elsevier, vol. 142(C).
    3. Runhuan Feng & Xiaochen Jing & Jan Dhaene, 2015. "Comonotonic Approximations of Risk Measures for Variable Annuity Guaranteed Benefits with Dynamic Policyholder Behavior," Tinbergen Institute Discussion Papers 15-008/IV/DSF85, Tinbergen Institute.
    4. repec:abd:kauiea:v:30:y:2017:i:2:p:135-157 is not listed on IDEAS
    5. Mussa Juma & Min Cherng Lee & Seong Tah Chin & Kian Wah Liew, 2017. "Evaluation of variable annuity guarantees with the effect of jumps in the asset price process," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1326218-132, January.

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    More about this item

    Keywords

    Periodical premiums; Equity-linked policy; Analytical pricing;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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