Fair valuation of participating policies with surrender options and regime switching

Tak Kuen Siu

Research output: Contribution to journalArticle

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 languageEnglish
Pages (from-to)533-552
Number of pages20
JournalInsurance: Mathematics and Economics
Volume37
Issue number3
DOIs
Publication statusPublished - 16 Dec 2005

Fingerprint

Regime Switching
Valuation
Geometric Brownian Motion
Optimal Stopping Problem
Linear Ordinary Differential Equations
Free Boundary Problem
Insurance
Piecewise Linear
Probability Measure
Decompose
Policy
Approximation

Keywords

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

Cite this

@article{3c697533517841df92b125df52e0b03f,
title = "Fair valuation of participating policies with surrender options and regime switching",
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. {\circledC} 2005 Elsevier B.V. All rights reserved.",
keywords = "Change of measures, Participating American policies, Perpetual contracts, Regime switching, Second-order piecewise linear ODEs",
author = "Siu, {Tak Kuen}",
year = "2005",
month = "12",
day = "16",
doi = "10.1016/j.insmatheco.2005.05.007",
language = "English",
volume = "37",
pages = "533--552",
journal = "Insurance: Mathematics and Economics",
issn = "0167-6687",
publisher = "Elsevier",
number = "3",

}

Fair valuation of participating policies with surrender options and regime switching. / Siu, Tak Kuen.

In: Insurance: Mathematics and Economics, Vol. 37, No. 3, 16.12.2005, p. 533-552.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Fair valuation of participating policies with surrender options and regime switching

AU - Siu, Tak Kuen

PY - 2005/12/16

Y1 - 2005/12/16

N2 - 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.

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

UR - http://www.scopus.com/inward/record.url?scp=29144482329&partnerID=8YFLogxK

U2 - 10.1016/j.insmatheco.2005.05.007

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

SN - 0167-6687

IS - 3

ER -