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Estimating the Present Value and the Break-Even Participating Rate for Equity-Linked Annuity Contracts

  • Journal of Insurance and Finance
  • 2005, 16(2), pp.25-48
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Hongmin Zi 1

1이화여자대학교

Accredited

ABSTRACT

This study analyzes equity-linked annuity contracts in terms of cliquet and compound options. We estimate the current values and the break-even participating rates of those contracts as well as the values of life-of-contract guarantee. To the cases in which there exist no closed form solutions, we employ the Monte Carlo simulation with the antithetic variable technique. The results show that the current values of those contracts increase as either volatility or participating rate increases and the risk-free interest rate decreases. With the use of variable values obtained from the current Korean economic conditions the break-even participating rate ranges between 30% to 60%. We also find that the value of life-of-contract guarantee is not negligible and increases significantly as the participating rate increases.

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