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Stochastic Interest Rate Approach of Pricing Participating Life Insurance Policies with Embedded Surrender Option
American Journal of Mathematical and Computer Modelling
Volume 3, Issue 1, March 2018, Pages: 10-21
Received: Feb. 15, 2018; Accepted: Mar. 9, 2018; Published: Apr. 8, 2018
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Mustapha Abdul-Rahaman, Department of Mathematics, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana
Francis Oduro, Department of Mathematics, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana
Al-Hassan Issahaku, Department of Informatics, Regent University College of Science and Technology, Accra, Ghana
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Life insurance contracts are priced and analysed using techniques from actuarial and modern financial mathematics, which requires that, the conditions for the risk-neutral valuation are fulfilled and that, a specified underlying security and an equivalent martingale measure must exist. This paper analysed life insurance endowment policy, paid by sequence of periodical premiums in Ghana with a guaranteed minimum return to the policyholder. Again, this paper presents two premium determination schemes for the insurance policy, the constant premium case and the periodical adjustment case in which both the benefit and the periodical premiums are annually adjusted in relation to the performance of a reference portfolio. It was realized that, with rising guaranteed interest rate, the rate of return on the reference portfolio, the premiums of the whole contract decreased both in the constant and the periodical adjustment cases whiles an increase in the participating coefficient and age of the insured led to an increase in the whole premium both in the constant and periodical adjustment cases. Also, it was revealed that, the premium of the non-surrendered bonus option is smaller in the constant premium case than in the periodical adjustment case and the premium of the bonus option in the surrendered participating policy looks cheap in the constant premium case than in the periodical adjustment case. Thus, it’s about 1.03% and 6.95% respectively of the total premium for the constant and for the periodical adjustment cases.
Stochastic Interest Rate, Surrender Option, Participating Policies, Life Insurance Policy, Periodical Premiums
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Mustapha Abdul-Rahaman, Francis Oduro, Al-Hassan Issahaku, Stochastic Interest Rate Approach of Pricing Participating Life Insurance Policies with Embedded Surrender Option, American Journal of Mathematical and Computer Modelling. Vol. 3, No. 1, 2018, pp. 10-21. doi: 10.11648/j.ajmcm.20180301.12
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This article is an open access article distributed under the Creative Commons Attribution License ( which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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