Pricing Rate of Return Guarantees in Regular Premium Unit Linked Insurance

Schrager, David; Pelsser, Antoon

doi:10.1016/j.insmatheco.2004.07.003

Cited by 35 publications

(19 citation statements)

References 35 publications

(45 reference statements)

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“…Though these situations may not be so important for options that just have an "Asian tail", it certainly is important when pricing rate-of-return guarantees which are embedded in many unitlinked insurance policies. These tend to have long maturities, and are in a Black-Scholes world equivalent to arithmetic Asian options, as has been shown by Schrager and Pelsser [2004]. Numerical examples of our finding will be shown in the last section.…”

Section: Proofsupporting

confidence: 69%

“…Although one is not advised to use a deterministic riskfree rate over such a long maturity (see e.g. Schrager and Pelsser [2004]), this example can still serve as a test case of how the bounds and approximations perform for long maturities.…”

Section: Numerical Results and Conclusionmentioning

confidence: 99%

“…Another example of such a structure is unit-linked insurance, as mentioned by e.g. Nielsen and Sandmann [2003] and Schrager and Pelsser [2004]. In its most basic form this can be described as an investment plan with a long maturity where periodic payments are invested in risky investment funds.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Partially exact and bounded approximations for arithmetic Asian options

Lord¹

2006

JCF

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This paper considers the pricing of European Asian options in the Black-Scholes framework. All approaches we consider are readily extendable to the case of an Asian basket option. We consider three methods for evaluating the price of an Asian option, and contribute to all three. Firstly, we show the link between the approaches of Rogers and Shi [1995], Andreasen [1999], Hoogland and Neumann [2000] and Večeř [2001]. For the latter formulation we propose two reductions, which increase the numerical stability and reduce the calculation time. Secondly, we show how a closed-form expression can be derived for Curran's and Rogers and Shi's lower bound for the general case of multiple underlyings. Thirdly, we considerably sharpen Thompson's [1999a,b] upper bound such that it is tighter than all known upper bounds. Finally, we consider analytical approximations and combine the traditional moment matching approximations with Curran's conditioning approach. The resulting class of partially exact and bounded approximations can be proven to lie between a sharp lower and upper bound. In numerical examples we demonstrate that they outperform all current state-of-the-art bounds and approximations.

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Section: Proofsupporting

confidence: 69%

Section: Numerical Results and Conclusionmentioning

confidence: 99%

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Partially exact and bounded approximations for arithmetic Asian options

Lord¹

2006

JCF

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“…One could then easily price several well studied options embedded in insurance contracts under stochastic mortality. Examples of such contracts are Guaranteed Annuity Options (GAOs) or Rate of Return Guarantees, see among others, Brennan and Schwartz (1976), Bacinello and Ortu (1993), Aase and Persson (1998), Boyle and Hardy (2003), Pelsser (2003) or Schrager and Pelsser (2004a).…”

Section: Introductionmentioning

confidence: 99%

Affine stochastic mortality

Schrager

2006

Insurance: Mathematics and Economics

Self Cite

159

113

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We propose a new model for stochastic mortality. The model is based on the literature on a¢ ne term structure models. It satis…es three important requirements for application in practice: analytical tractibility, clear interpretation of the factors and compatibility with …nancial option pricing models. We test the model …t using data on Dutch mortality rates. Furthermore, we discuss the speci…cation of a market price of mortality risk and apply the model to the pricing of a Guaranteed Annuity Option and the calculation of required Economic Capital for mortality risk.

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“…13 The profit-sharing options are priced using an adaptation of Black's option formula (see Hull, 2006). 14 The unit-linked options are priced using the formula proposed by Schrager and Pelsser (2004). 15 The present value of these guarantee fees may become larger (in an absolute sense) than the unit-linked reserve.…”

Section: Example Balance Sheetmentioning

confidence: 99%

Liability-Driven Investing for Life Insurers

Bragt

Kort

2010

Geneva Pap Risk Insur Issues Pract

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Liability-driven investing (LDI) has recently emerged as a powerful paradigm in financial risk management. The basic idea behind LDI is to split the company's balance sheet into two separate balance sheets: one for the liabilities and the matching assets and one for the other (return) assets and the surplus. We show that constructing a proper liability-hedging portfolio (LHP) is very attractive for life insurers because the liability-driven risks can be suppressed without a negative impact on overall return. When these risks are covered by the LHP, the return assets can be optimised using well-known (Markowitz) optimisation techniques or (equity) hedge strategies. The LDI approach thus stimulates insurers to address all risks embedded in the insurance liabilities and facilitates the subsequent optimisation of the return assets.

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Pricing Rate of Return Guarantees in Regular Premium Unit Linked Insurance

Cited by 35 publications

References 35 publications

Partially exact and bounded approximations for arithmetic Asian options

Partially exact and bounded approximations for arithmetic Asian options

Affine stochastic mortality

Liability-Driven Investing for Life Insurers

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