Valuation of the surrender option in unit-linked life insurance policies in a non-rational behaviour framework
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.
|Date of creation:||Oct 2007|
|Date of revision:|
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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.
- 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.
- Wang, Shaun S., 2002. "A Universal Framework for Pricing Financial and Insurance Risks," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 32(02), pages 213-234, November.
- 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.
- Wang, Shaun, 1996. "Premium Calculation by Transforming the Layer Premium Density," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 26(01), pages 71-92, May.
- 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.
- Bacinello, Anna Rita, 2005. "Endogenous model of surrender conditions in equity-linked life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 270-296, October.
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