Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution

Crisis events have significantly changed the view that extreme events in financial markets have negligible probability. Especially in the life insurance market, the price of guaranteed participating life insurance contract will be affected by a change in asset volatility which leads to the fluctuati...

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Main Authors: Haitao Zheng, Junzhang Hao, Manying Bai, Zhengjun Zhang
Format: Article
Language:English
Published: Wiley 2019-01-01
Series:Discrete Dynamics in Nature and Society
Online Access:http://dx.doi.org/10.1155/2019/9439786
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author Haitao Zheng
Junzhang Hao
Manying Bai
Zhengjun Zhang
author_facet Haitao Zheng
Junzhang Hao
Manying Bai
Zhengjun Zhang
author_sort Haitao Zheng
collection DOAJ
description Crisis events have significantly changed the view that extreme events in financial markets have negligible probability. Especially in the life insurance market, the price of guaranteed participating life insurance contract will be affected by a change in asset volatility which leads to the fluctuations in embedded option value. Considering the correlation of different asset prices, MEGB2 (multivariate exponential generalized beta of the second kind) distribution is proposed to price guaranteed participating life insurance contract which can effectively describe the dependence structure of assets under some extreme risks. Assuming the returns of two different assets follow the MEGB2 distribution, a multifactor fair valuation pricing model of insurance contract is split into four components: the basic contract, the annual dividend option, the terminal dividend option, and the surrender option. This paper studies the effect of death rate, minimum guaranteed yield rate, annual dividend ratio, terminal dividend ratio, and surrender on the embedded option values and calculates the single premium of the insurance contract under different influence factors. The Least-Squares Monte Carlo simulation method is used to simulate the pricing model. This article makes a comparison in the sensitivity of the pricing parameters under the MEGB2 distribution and Multivariate Normal distribution asset returns. Finally, an optimal hedging strategy is designed to cover the possible risks of the underlying assets, which can effectively hedge the risks of portfolio.
format Article
id doaj-art-15f4dc8829fd4547aaa362fc0e49be20
institution Kabale University
issn 1026-0226
1607-887X
language English
publishDate 2019-01-01
publisher Wiley
record_format Article
series Discrete Dynamics in Nature and Society
spelling doaj-art-15f4dc8829fd4547aaa362fc0e49be202025-02-03T01:02:49ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2019-01-01201910.1155/2019/94397869439786Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 DistributionHaitao Zheng0Junzhang Hao1Manying Bai2Zhengjun Zhang3School of Economics & Management, Beihang University, Beijing, 100083, ChinaSchool of Economics & Management, Beihang University, Beijing, 100083, ChinaSchool of Economics & Management, Beihang University, Beijing, 100083, ChinaDepartment of Statistics, University of Wisconsin, Madison, WI 53706, USACrisis events have significantly changed the view that extreme events in financial markets have negligible probability. Especially in the life insurance market, the price of guaranteed participating life insurance contract will be affected by a change in asset volatility which leads to the fluctuations in embedded option value. Considering the correlation of different asset prices, MEGB2 (multivariate exponential generalized beta of the second kind) distribution is proposed to price guaranteed participating life insurance contract which can effectively describe the dependence structure of assets under some extreme risks. Assuming the returns of two different assets follow the MEGB2 distribution, a multifactor fair valuation pricing model of insurance contract is split into four components: the basic contract, the annual dividend option, the terminal dividend option, and the surrender option. This paper studies the effect of death rate, minimum guaranteed yield rate, annual dividend ratio, terminal dividend ratio, and surrender on the embedded option values and calculates the single premium of the insurance contract under different influence factors. The Least-Squares Monte Carlo simulation method is used to simulate the pricing model. This article makes a comparison in the sensitivity of the pricing parameters under the MEGB2 distribution and Multivariate Normal distribution asset returns. Finally, an optimal hedging strategy is designed to cover the possible risks of the underlying assets, which can effectively hedge the risks of portfolio.http://dx.doi.org/10.1155/2019/9439786
spellingShingle Haitao Zheng
Junzhang Hao
Manying Bai
Zhengjun Zhang
Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution
Discrete Dynamics in Nature and Society
title Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution
title_full Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution
title_fullStr Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution
title_full_unstemmed Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution
title_short Valuation of Guaranteed Unitized Participating Life Insurance under MEGB2 Distribution
title_sort valuation of guaranteed unitized participating life insurance under megb2 distribution
url http://dx.doi.org/10.1155/2019/9439786
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AT junzhanghao valuationofguaranteedunitizedparticipatinglifeinsuranceundermegb2distribution
AT manyingbai valuationofguaranteedunitizedparticipatinglifeinsuranceundermegb2distribution
AT zhengjunzhang valuationofguaranteedunitizedparticipatinglifeinsuranceundermegb2distribution