Fair valuation of participating policies with surrender options and regime-switching

Tak Kuen Siu*

*Corresponding author for this work

Research output: Contribution to journalArticle

57 Citations (Scopus)

Abstract

We consider the fair valuation of a participating life insurance policy with surrender options when the market values of the asset are modelled by Markov-modulated Geometric Brownian Motion (GBM). We reduce the dimension of the optimal stopping problem for the policy by changing probability measures. We also provide a decomposition result for the value of the policy. The Barone-Adesi-Whaley approximation has been employed to approximate the solution of the free boundary problem for the policy by second-order piecewise linear ordinary differential equations (ODEs). The fair valuation of participating perpetual American contracts are also considered.

Original languageEnglish
Pages (from-to)533-552
Number of pages20
JournalInsurance: Mathematics and Economics
Volume37
Issue number3
DOIs
Publication statusPublished - 16 Dec 2005
Externally publishedYes

Keywords

  • Change of measures
  • Participating American policies
  • Perpetual contracts
  • Regime switching
  • Second-order piecewise linear ODEs

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