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Fair pricing of life insurance participating policies with embedded surrender option under stochastic interest rate model
(June 2016) Abdul-Rahaman, Mustapha
The study analysed life insurance endowment policy, paid by sequence of periodical premiums with guaranteed minimum return to the policyholder. The main objective of the research is to estimate the \fair price" of life insurance participating policy under stochastic interest rate model, in particular, the study considered both the case in which the premium is constant and the case in which it is periodically adjusted according to the performance of a special investment portfolio (reference portfolio). This premium is implicitly de ned by an equation based on the actuarial principle of equivalence. Furthermore, the policy under examination is characterized by the presence of a surrender option, i.e., an American-style option that entitles policy owners to early terminate the contract and to receive a surrender cash value implied by a surrender charge. The study employed extended two-dimensional Cox- Ross and Rubinstein model to numerically estimate the \fair price" of the embedded surrender option.