A Finite Difference Approach to the Valuation of Path Dependent Life Insurance Liabilities
This paper sets up a model for the valuation of traditional participating life insurance policies. These claims are characterized by their explicit interest rate guarantees and by various embedded option elements, such as bonus and surrender options. Owing to the structure of these contracts, the theory of contingent claims pricing is a particularly well-suited framework for the analysis of their valuation.The eventual benefits (or pay-offs) from the contracts considered crucially depend on the history of returns on the insurance company's assets during the contract period. This path-dependence prohibits the derivation of closed-form valuation formulas but we demonstrate that the dimensionality of the problem can be reduced to allow for the development and implementation of a finite difference algorithm for fast and accurate numerical evaluation of the contracts. We also demonstrate how the fundamental financial model can be extended to allow for mortality risk and we provide a wide range of numerical pricing results. The Geneva Papers on Risk and Insurance Theory (2001) 26, 57–84. doi:10.1023/A:1011264408187
Volume (Year): 26 (2001)
Issue (Month): 1 (June)
|Contact details of provider:|| Web page: http://www.palgrave-journals.com/|
Postal:Route de Malagnou 53, CH - 1208 Geneva
Phone: +41-22 707 66 00
Fax: +41-22 736 75 36
Web page: https://www.genevaassociation.org/
More information through EDIRC
|Order Information:||Web: http://www.springer.com/journal/10713|
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.:
- Steinar Ekern & Svein-Arne Persson, 1996. "Exotic Unit-Linked Life Insurance Contracts," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 21(1), pages 35-63, June.
- Aase Nielsen, J. & Sandmann, Klaus, 1995.
"Equity-linked life insurance: A model with stochastic interest rates,"
Insurance: Mathematics and Economics,
Elsevier, vol. 16(3), pages 225-253, July.
- Nielsen, J. Aase & Klaus Sandmann, 1995. "Equity-linked life insurance - a model with stochastic interest rates," Discussion Paper Serie B 291, University of Bonn, Germany, revised Mar 1995.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pal:genrir:v:26:y:2001:i:1:p:57-84. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.