Fast simulation of equity-linked life insurance contracts with a surrender option

Authors:
Carole Bernard;Christiane Lemieux
Affiliations:
University of Waterloo, Waterloo, ON, Canada;University of Waterloo, Waterloo, ON, Canada
Venue:
Proceedings of the 40th Conference on Winter Simulation
Year:
2008

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Abstract

In this paper, we consider equity-linked life insurance contracts that give their holder the possibility to surrender their policy before maturity. Such contracts can be valued using simulation methods proposed for the pricing of American options, but the mortality risk must also be taken into account when pricing such contracts. Here, we use the least-squares Monte Carlo approach of Longstaff and Schwartz coupled with quasi-Monte Carlo sampling and a control variate in order to construct efficient estimators for the value of such contracts. We also show how to incorporate the mortality risk into these pricing algorithms without explicitly simulating it.