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Pricing of the Policy Life in Absence of Default Risk and Asset Liability Management

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  • Giandomenico, Rossano

Abstract

The model, by using the option theory, determines the fair value of the life insurance policies in absence of default risk and shows that the fair fixed guaranteed interest-rate is less than the risk free interest rate due to the exchange of options between policyholders and shareholders. Furthermore, it shows that the effective liabilities duration is different from the duration of a default free zero coupon bond with the same time of maturity such that the equity value is immunized by using a perfect hedge ratio.

Suggested Citation

  • Giandomenico, Rossano, 2006. "Pricing of the Policy Life in Absence of Default Risk and Asset Liability Management," MPRA Paper 18844, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:18844
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    References listed on IDEAS

    as
    1. David Babbel & Craig Merrill, 1998. "Economic Valuation Models for Insurers," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(3), pages 1-15.
    2. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    5. Giandomenico, Rossano, 2006. "Valuing an American Put Option," MPRA Paper 20082, University Library of Munich, Germany.
    6. Geske, Robert & Johnson, Herb E, 1984. "The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-1524, December.
    7. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    8. Giandomenico, Rossano, 2006. "Martingale Model," MPRA Paper 21973, University Library of Munich, Germany.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Giandomenico, Rossano, 2006. "Asset Liability Management in Insurance Company," MPRA Paper 16333, University Library of Munich, Germany, revised Jan 2009.
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    Cited by:

    1. Giandomenico, Rossano, 2014. "Finance & Stochastic," MPRA Paper 71627, University Library of Munich, Germany.
    2. Giandomenico, Rossano, 2006. "Asset Liability Management in Insurance Company," MPRA Paper 16333, University Library of Munich, Germany, revised Jan 2009.
    3. Rossano Giandomenico, 2011. "Asset Liability Management for Banks," The IUP Journal of Bank Management, IUP Publications, vol. 0(4), pages 31-46, November.

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    More about this item

    Keywords

    Contingent Claim; Duration;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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