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Zbl 1129.60062
Siu, Tak Kuen
Fair valuation of participating policies with surrender options and regime switching. (English)
[J] Insur. Math. Econ. 37, No. 3, 533-552 (2005). ISSN 0167-6687

Summary: We consider the fair valuation of a participating life insurance policy with surrender options when the market values of the asset are modelled by Markov-modulated Geometric Brownian Motion (GBM). We reduce the dimension of the optimal stopping problem for the policy by changing probability measures. We also provide a decomposition result for the value of the policy. The Barone-Adesi-Whaley approximation has been employed to approximate the solution of the free boundary problem for the policy by second-order piecewise linear ordinary differential equations (ODEs). The fair valuation of participating perpetual American contracts are also considered.

MSC 2000:: *60H30 Appl. of stochastic analysis
60G40 Optimal stopping
60H10 Stochastic ordinary differential equations
91B28 Finance etc.
91B30 Risk theory etc.

Keywords: participating American policies; perpetual contracts; change of measures; second-order piecewise linear ODEs; regime switching

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