An analytical study of participating policies with minimum rate guarantee and surrender option

DOI10.1007/S00780-022-00471-0MaRDI QIDQ2120540zbMATH OpenOpenAlexFDO

Authors Tiziano De Angelis, G. Stabile, Maria B. Chiarolla

Publication date 1 April 2022

Published in Finance and Stochastics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/2004.06982

zbMATH Keywords

free-boundary problemsminimum rate guaranteeoptimal stoppingparticipating policiessolvency requirementstop-loss boundarysurrender optiontoo-good-to-persist boundary

Mathematics Subject Classification ID

Free boundary problems for PDEs (35R35) Stopping times; optimal stopping problems; gambling theory (60G40) Applications of statistics to actuarial sciences and financial mathematics (62P05) Actuarial mathematics (91G05)

Abstract: We perform a detailed theoretical study of the value of a class of participating policies with four key features: $(i)$ the policyholder is guaranteed a minimum interest rate on the policy reserve; $(ii)$ the contract can be terminated by the holder at any time until maturity (surrender option); $(iii)$ at the maturity (or upon surrender) a bonus can be credited to the holder if the portfolio backing the policy outperforms the current policy reserve; $(iv)$ due to solvency requirements the contract ends if the value of the underlying portfolio of assets falls below the policy reserve. Our analysis is probabilistic and it relies on optimal stopping and free boundary theory. We find a structure of the optimal surrender strategy which was undetected by previous (mostly numerical) studies on the same topic. Optimal surrender of the contract is triggered by two `stop-loss' boundaries and by a `too-good-to-persist' boundary (in the language of cite{EV20}). Financial implications of this strategy are discussed in detail and supported by extensive numerical experiments.

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Cited in

(8)

• Intervention options in life insurance
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