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A Full Monte Carlo Approach to the Valuation of the Surrender Option Embedded in Life Insurance Contracts

In: Mathematical and Statistical Methods in Insurance and Finance

Author

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  • Anna Rita Bacinello

    (University of Trieste)

Abstract

In this paper we extend the Least Squares Monte Carlo approach proposed by Longstaff and Schwartz for the valuation of American-style contingent-claims to the case of life insurance contracts. These contracts, in fact, often embed an American-style option, called surrender option, that entitles its owner to terminate early the contract and receive a cash amount, called surrender value. The additional complication arising in life insurance policies with respect to purely financial American contracts is that there is not a fixed date within which the option can be exercised, since its “maturity” is driven by mortality factors. This complication has been handled by very few papers, often at the cost of excessively simplified valuation frameworks. The aim of this contribution, that is not a specific valuation model but a methodological approach, is to allow a full exploitation of the flexibility inborn in Monte Carlo and quasi-Monte Carlo methods in order to deal with more realistic valuation frameworks.

Suggested Citation

  • Anna Rita Bacinello, 2008. "A Full Monte Carlo Approach to the Valuation of the Surrender Option Embedded in Life Insurance Contracts," Springer Books, in: Cira Perna & Marilena Sibillo (ed.), Mathematical and Statistical Methods in Insurance and Finance, pages 19-26, Springer.
    • Handle: RePEc:spr:sprchp:978-88-470-0704-8_3
    DOI: 10.1007/978-88-470-0704-8_3
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    Cited by:

    1. Cheng, Chunli & Hilpert, Christian & Miri Lavasani, Aidin & Schaefer, Mick, 2023. "Surrender contagion in life insurance," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1465-1479.

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