Pricing Life Insurance Contracts with Early Exercise Features

Journal of Computational and Applied Mathematics, Forthcoming

16 Pages Posted: 9 Jan 2008 Last revised: 23 Jul 2009

See all articles by Anna Rita Bacinello

Anna Rita Bacinello

University of Trieste - Dipartimento di Matematica Applicata

Enrico Biffis

Imperial College Business School

Pietro Millossovich

The Business School (formerly Cass); University of Trieste - Dipartimento di Scienze Aziendali Economiche Matematiche e Statistiche B. de Finetti

Abstract

In this paper we describe an algorithm based on the Least Squares Monte Carlo method to price life insurance contracts embedding American options. We focus on equity-linked contracts with surrender options and terminal guarantees on benefits payable upon death, survival and surrender. The framework allows for randomness in mortality as well as stochastic volatility and jumps in financial risk factors. We provide numerical experiments demonstrating the performance of the algorithm in the context of multiple risk factors and exercise dates.

Keywords: insurance contracts, surrender options, Least Squares Monte Carlo method, American contingent claims

JEL Classification: C61, G13, G22, G23

Suggested Citation

Bacinello, Anna Rita and Biffis, Enrico and Millossovich, Pietro, Pricing Life Insurance Contracts with Early Exercise Features. Journal of Computational and Applied Mathematics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1081944 or http://dx.doi.org/10.2139/ssrn.1081944

Anna Rita Bacinello

University of Trieste - Dipartimento di Matematica Applicata ( email )

Piazzale Europa, 1
Trieste, 34127
Italy

Enrico Biffis (Contact Author)

Imperial College Business School ( email )

Imperial College London
South Kensington campus
London, SW7 2AZ
United Kingdom

Pietro Millossovich

The Business School (formerly Cass) ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

University of Trieste - Dipartimento di Scienze Aziendali Economiche Matematiche e Statistiche B. de Finetti ( email )

Piazzale Europa, 1
Trieste, 34127
Italy

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