SFB 303 Discussion Paper No. B-327

Author: Nielsen, J. Aase, and Klaus Sandmann
Title: Uniqueness of the Fair Premium for Equity-Linked Life Insurance Contracts
Abstract: An equity-linked life insurance contract combines an endowment life insurance and an investment strategy with a minimum guarantee. The benefit of this contract is determined by the guaranteed amount plus a bonus equal to a call on the portfolio. This bonus is similar to an Asian option. We analyze the relationship between the periodic insurance premium and its proportional share invested into the portfolio. For a general model of the financial risks we show the existence and uniqueness of an insurance premium. Furthermore the premium is strictly increasing and convex as a function of the share invested. An earlier version of this paper was presented under the title Security Linked Life Policies under Stochastic Interest Rates .
Keywords: Asian option, forward risk adjusted measure, Monte Carlo simulations, life insurance, stochastic interest rates
JEL-Classification-Number: G13
Creation-Date: September 1995, this version March 1996
URL: ../1995/b/bonnsfb327.pdf

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