Title: Valuation of the surrender option in equity-linked life insurance contracts

Authors: Dorra Guermazi Ammous; Fathi Abid

Addresses: Higher School of Numerical Economy, University of Manouba, Tunisia ' Modesfi Research Unit, University of Sfax, Tunisia

Abstract: In this paper, we consider the surrender option, a specific embedded option in unit-linked life insurance contracts that gives the insured the right to terminate early the contract before maturity and receive a cash amount called surrender value. We use the no arbitrage approach to value the surrender option, seen as an US option. The valuation is based on the Cox et al. (1979) binomial model. The aim of this contribution is to expose the methodological approach in the particular case of the single premium contract, with focus on the surrender option valuation and to allow the exploitation of this intuitive and flexible method in order to deal with more realistic and complex valuation frameworks.

Keywords: equity-linked life insurance contract; surrender option; binomial model.

DOI: 10.1504/IJAUDIT.2017.091320

International Journal of Auditing Technology, 2017 Vol.3 No.4, pp.282 - 296

Available online: 17 Apr 2018 *

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