Journal
ASTIN BULLETIN
Volume 40, Issue 1, Pages 65-95Publisher
CAMBRIDGE UNIV PRESS
DOI: 10.2143/AST.40.1.2049219
Keywords
Life insurance; Risk-neutral valuation; Embedded options; Bermudan options; Nested simulations; PDE methods; Least-squares Monte Carlo
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In recent years, market-consistent valuation approaches have gained an increasing importance for insurance companies. This has triggered an increasing interest among practitioners and academics, and a number of specific studies on such valuation approaches have been published. In this paper, we present a generic model for the valuation of life insurance contracts and embedded options. Furthermore, we describe various numerical valuation approaches within our generic setup. We particularly focus on contracts containing early exercise features since these present (numerically) challenging valuation problems. Based on an example of participating life insurance contracts, we illustrate the different approaches and compare their efficiency in a simple and a generalized Black-Scholes setup, respectively. Moreover, we study the impact of the considered early exercise feature on our example contract and analyze the influence of model risk by additionally introducing an exponential Levy model.
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