Template-Type: ReDIF-Paper 1.0
Title: Bilateral Trade, Openness and Asset Holdings
Author-Name: Jing Li
Author-Email: lijing@uni-bonn.de
Author-Name: Alexander Szimayer
Author-Email: szimayer@uni-bonn.de
Classification-JEL: G13, G22, C65
Keywords: unit-linked life insurance contracts, surrender guarantee, limited rationality,
	fair contract analysis
Abstract: 	We study the valuation of unit-linked life insurance contracts with 
	surrender guarantees. Instead of solving an optimal stopping problem, we propose
	a more realistic approach accounting for policyholders’ rationality in exercising 
	their surrender option. The valuation is conducted at the portfolio level by 
	assuming the surrender intensity to be bounded from below and from above. The lower
	bound corresponds to purely exogenous surrender and the upper bound represents 
	the limited rationality of the policyholders. The valuation problem is formulated 
	by a valuation PDE and solved with the finite difference method. We show that the 
	rationality of the policyholders has a significant effect on average contract value 
	and hence on the fair contract design. We also present the separating boundary between
	purely exogenous surrender and endogenous surrender. This provides implications on the 
	predicted surrender activity of the policyholders. 
Note: 
Length: 22
Creation-Date: 2010-12
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse22_2010.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse22_2010