Fair valuation of participating policies with surrender options and regime switching

Tak Kuen Siu

doi:10.1016/j.insmatheco.2005.05.007

Fair valuation of participating policies with surrender options and regime switching

Tak Kuen Siu

Research output: Contribution to journal › Article › peer-review

68 Citations (Scopus)

Abstract

We consider the fair valuation of a participating life insurance policy with surrender options when the market values of the asset are modelled by Markov-modulated Geometric Brownian Motion (GBM). We reduce the dimension of the optimal stopping problem for the policy by changing probability measures. We also provide a decomposition result for the value of the policy. The Barone-Adesi-Whaley approximation has been employed to approximate the solution of the free boundary problem for the policy by second-order piecewise linear ordinary differential equations (ODEs). The fair valuation of participating perpetual American contracts are also considered. © 2005 Elsevier B.V. All rights reserved.

Original language	English
Pages (from-to)	533-552
Number of pages	20
Journal	Insurance: Mathematics and Economics
Volume	37
Issue number	3
DOIs	https://doi.org/10.1016/j.insmatheco.2005.05.007
Publication status	Published - 16 Dec 2005

Keywords

Change of measures
Participating American policies
Perpetual contracts
Regime switching
Second-order piecewise linear ODEs

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10.1016/j.insmatheco.2005.05.007

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AB - We consider the fair valuation of a participating life insurance policy with surrender options when the market values of the asset are modelled by Markov-modulated Geometric Brownian Motion (GBM). We reduce the dimension of the optimal stopping problem for the policy by changing probability measures. We also provide a decomposition result for the value of the policy. The Barone-Adesi-Whaley approximation has been employed to approximate the solution of the free boundary problem for the policy by second-order piecewise linear ordinary differential equations (ODEs). The fair valuation of participating perpetual American contracts are also considered. © 2005 Elsevier B.V. All rights reserved.

KW - Change of measures

KW - Participating American policies

KW - Perpetual contracts

KW - Regime switching

KW - Second-order piecewise linear ODEs

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DO - 10.1016/j.insmatheco.2005.05.007

M3 - Article

VL - 37

SP - 533

EP - 552

JO - Insurance: Mathematics and Economics

JF - Insurance: Mathematics and Economics

IS - 3

ER -

Fair valuation of participating policies with surrender options and regime switching

Abstract

Keywords

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