We consider the problem of computing the fair value of equity-linked policies with an interestrate guarantee when the insurer is subject to credit risk. The framework is developed based on modern financial theory using the no-arbitrage principle. In this context, an equity-linked policy is considered as a vulnerable contingent claim that expires before maturity if the firm asset value falls below a pre-specified default threshold depending on the firm’s liabilities. We derive a closed form formula in a continuous-time environment to compute the fair value of the contract. We also develop a discrete time model that allows us to address fair evaluation when the policy embeds a surrender option.

Fair valuation of equity-linked policies under insurer default risk

COSTABILE, Massimo;MASSABO', Ivar;RUSSO, EMILIO
2011

Abstract

We consider the problem of computing the fair value of equity-linked policies with an interestrate guarantee when the insurer is subject to credit risk. The framework is developed based on modern financial theory using the no-arbitrage principle. In this context, an equity-linked policy is considered as a vulnerable contingent claim that expires before maturity if the firm asset value falls below a pre-specified default threshold depending on the firm’s liabilities. We derive a closed form formula in a continuous-time environment to compute the fair value of the contract. We also develop a discrete time model that allows us to address fair evaluation when the policy embeds a surrender option.
Fair value of equity-linked policies.; Default risk.; Outside barrier options
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.11770/154017
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