By Mary Hardy
Funding promises conscientiously pulls jointly all the most up-to-date versions and techniques which are priceless in dealing with the danger linked to equity-linked coverage. jam-packed with specialist insights and confirmed recommendations, this publication is a priceless one-stop reference that might let you larger comprehend the speculation and perform at the back of modeling and danger administration for equity-linked lifestyles coverage.
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On withdrawal, the VA policyholder takes the proceeds of the separate account, without the put option payment. The EIA policyholder withdraws with their premium accumulated at some ﬁxed rate, without the call-option payment. American options may be relevant where equity participation and minimum accumulation guarantees are both offered on early surrender. Asian options are relevant for some EIA contracts where the equity participation can be based on an average of the underlying stock price rather than on the ﬁnal value.
The fundamental result of Black, Scholes, and Merton was that securities may be valued and the replicating portfolio derived by taking the expected value of the payoff, but under a different, artiﬁcial distribution known as the Q-measure (or risk-neutral measure). In Chapter 7 we discuss the relationship between these two measures. There are some complications in applying this theory to the options embedded in equity-linked insurance. The major problem is the very longterm nature of the equity-linked options.
3. A single path may not capture the risk appropriately for all contracts, particularly if the guarantee may be ratcheted upward from time to time. The one-time drop and steady rise may be less damaging than a sharp rise followed by a period of poor returns, for contracts with guarantees that depend on the stock index path rather than just the ﬁnal value. The guaranteed minimum accumulation beneﬁt (GMAB) is an example of this type of path-dependent beneﬁt. Deterministic testing is easy but does not provide the essential qualitative or quantitative information.