BFS 2002

Poster Presentation

Fair Valuation of a Guaranteed Life Insurance Participating Contract Embedding a Surrender Option

Anna Rita Bacinello

In this paper we deal with the problem of pricing a guaranteed life insurance participating policy, traded in the Italian market, which embeds a surrender option. This feature is an American-style put option that enables the policyholder to sell back the contract to the insurer at the surrender value. Employing a recursive binomial formula patterned after the Cox, Ross and Rubinstein discrete option pricing model we compute, first of all, the total price of the contract, which includes also a compensation for the participation feature ("participation option", henceforth). Then this price is split into the value of three components: the "basic contract", the "participation option" and the "surrender option". The numerical implementation of the model allows us to catch some comparative statics properties and to tackle the problem of suitably fixing the contractual parameters in order to obtain the premium computed by insurance companies according to standard actuarial practice.