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Pricing of the Policy Life in Absence of Default Risk and Asset Liability Management

Giandomenico, Rossano (2006): Pricing of the Policy Life in Absence of Default Risk and Asset Liability Management.

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Abstract

The model, by using the option theory, determines the fair value of the life insurance policies in absence of default risk and shows that the fair fixed guaranteed interest-rate is less than the risk free interest rate due to the exchange of options between policyholders and shareholders. Furthermore, it shows that the effective liabilities duration is different from the duration of a default free zero coupon bond with the same time of maturity such that the equity value is immunized by using a perfect hedge ratio.

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