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 early terminate 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. Then the aim of this contribution is to provide a methodological approach that allows a full exploitation of the flexibility inborn in Monte Carlo and quasi-Monte Carlo methods in order to deal with more realistic valuation frameworks.

A full Monte Carlo approach to the valuation of the surrender option embedded in life insurance contracts

BACINELLO, ANNA RITA
2008

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 early terminate 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. Then the aim of this contribution is to provide a methodological approach that allows a full exploitation of the flexibility inborn in Monte Carlo and quasi-Monte Carlo methods in order to deal with more realistic valuation frameworks.
9788847007031
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11368/1716547
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