Variance and Interest Rate Risk in Unit-Linked Insurance Policies

David Baños, Marc Lagunas-Merino and Salvador Ortiz-Latorre
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David Baños: Department of Mathematics, University of Oslo, PO Box 1053 Blindern, 0316 Oslo, Norway
Marc Lagunas-Merino: Department of Mathematics, University of Oslo, PO Box 1053 Blindern, 0316 Oslo, Norway
Salvador Ortiz-Latorre: Department of Mathematics, University of Oslo, PO Box 1053 Blindern, 0316 Oslo, Norway

Risks, 2020, vol. 8, issue 3, 1-23

Abstract: One of the risks derived from selling long-term policies that any insurance company has arises from interest rates. In this paper, we consider a general class of stochastic volatility models written in forward variance form. We also deal with stochastic interest rates to obtain the risk-free price for unit-linked life insurance contracts, as well as providing a perfect hedging strategy by completing the market. We conclude with a simulation experiment, where we price unit-linked policies using Norwegian mortality rates. In addition, we compare prices for the classical Black-Scholes model against the Heston stochastic volatility model with a Vasicek interest rate model.

Keywords: unit-linked policies; pure endowment; term insurance; stochastic volatility models; stochastic interest rates (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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