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Analytical Pricing of the Unit-Linked Endowment with Guarantees and Periodic Premiums

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  • Hürlimann, Werner

Abstract

We consider the unit-linked endowment with guarantee and periodic premiums, where at each premium payment date the insurance company invests a certain fraction of the premium into a risky reference portfolio. In the dual random environment of stochastic interest rates with deterministic volatilities and mortality risk, and for a fixed guarantee, simple analytical lower and upper bounds for the fair periodic premium are explicitly derived. We also consider contracts with guaranteed minimum benefits that vary over time and we obtain tight lower and upper bounds for both fair periodic premiums and guaranteed minimum benefits that increase over time. The numerical illustrations of our results reveal that the analytical bounds are very tight. Moreover, the simple, fast and very reliable analytical numerical calculations with controlled accuracy avoid time consuming Monte Carlo calculations and are almost always preferred by practitioners. Some analytical closed-form solutions for one- and two-year maturity dates are also stated.

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  • Hürlimann, Werner, 2010. "Analytical Pricing of the Unit-Linked Endowment with Guarantees and Periodic Premiums," ASTIN Bulletin, Cambridge University Press, vol. 40(2), pages 631-653, November.
    • Handle: RePEc:cup:astinb:v:40:y:2010:i:02:p:631-653_00
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    1. Pagnoncelli, Bernardo K. & Vanduffel, Steven, 2012. "A provisioning problem with stochastic payments," European Journal of Operational Research, Elsevier, vol. 221(2), pages 445-453.

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