Valuation of guaranteed unitized participating life insurance under GEV distribution

The price of option is affected by high volatilities of asset returns. Normal distribution and geometric Brownian motion cannot characterize leptokurtosis and heavy tails of asset returns, which leads to a biased option pricing. Due to guaranteed unitized participating life insurance contracts typically contain various types of implied options, the contract premium will be significantly biased by distribution assumptions. Considering the economic crisis which may change the distribution, this paper extends valuation method of guaranteed unitized participating life insurance under the generalized extreme value (GEV) distribution. Based on the assumption that the returns follow the GEV distribution, we establish a multi-factor fair valuation pricing model of guaranteed unitized participating life insurance contract. It can explicitly capture the negative skewness and the excess kurtosis of asset returns. We study effects of different factors on embedded option values and calculate different annual premiums. The Least-Squares Monte Carlo simulation method is used to simulate the pricing model. Finally, we compare the parameter sensitivity under the GEV and Normal asset returns.