Valuation of life insurance surrender and exchange options |
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Authors: | Helge A Nordahl |
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Institution: | aDepartment of Finance and Management Science, Norwegian School of Economics and Business Administration, Norway |
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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. |
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Keywords: | Surrender options Exchange options Life and pension insurance |
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