Variance and interest rate risk in unit-linked insurance policies

2020/06/26 by Baños, David R., Lagunas-Merino, Marc, Ortiz-Latorre, Salvador
#60H30 #91G20 #91G30 #91G60 #FOS: Economics and business #FOS: Mathematics #Pricing of Securities (q-fin.PR) #Probability (math.PR)

paper · doi:10.48550/arxiv.2006.14833

Abstract

One of the risks derived from selling long term policies that any insurance company has, arises from interest rates. In this paper we consider a general class of stochastic volatility models written in forward variance form. We also deal with stochastic interest rates to obtain the risk-free price for unit-linked life insurance contracts, as well as providing a perfect hedging strategy by completing the market. We conclude with a simulation experiment, where we price unit-linked policies using Norwegian mortality rates. In addition we compare prices for the classical Black-Scholes model against the Heston stochastic volatility model with a Vasicek interest rate model.

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• Phase-type representations of stochastic interest rates with applications to life insurance
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