Valuation of life insurance surrender and exchange options

Helge Nordahl ()

Insurance: Mathematics and Economics, 2008, vol. 42, issue 3, 909-919

Abstract: In this paper I analyze two American-type options related to life and pension insurance contract. I use Monte Carlo simulations combined with the Longstaff and Schwartz approach for the valuation of American options to find the value of a typical surrender option. I find that the values may be much lower than previously indicated. This reduction of value is due to a different treatment of bonuses, limiting the customers' ability to forecast the return of their policies. The numerical results show that the value may be higher than the corresponding surrender option.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:42:y:2008:i:3:p:909-919

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