Pricing Guaranteed Life Insurance Participating Policies with Annual Premiums and Surrender Option

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Abstract
This paper analyzes a life insurance endowment policy, paid by annual premiums, in which the benefit is annually adjusted according to the performance of a special investment portfolio and a minimum return is guaranteed to the policyholder. In particular, the author considers both the case in which the annual premium is constant and the case in which the premium also is adjusted according to the performance of the reference portfolio. Moreover, the policy under scrutiny is characterized by the presence of a surrender option, that is, of an American-style put option that enables the policyholder to give up the contract and receive the surrender value. The aim of the paper is to give sufficient conditions under which there exists a (unique) fair premium. This premium is implicitly defined by an equation (or, alternatively, can be viewed as a fixed point of a suitable function) based on a recursive binomial tree àla Cox, Ross, and Rubinstein (1979). An iterative algorithm is then implemented in order to compute it.