A Study On The Participating Policy Value With Embedded Surrender Option Under Random Interest Rate

The participating policy is the dominant product of China's life insurance, but it has been facing a serious problem of surrender. The accurate analysis on the value of the participating policy with a surrender option has great significance for insurance companies'risk controlling, product designing and pricing.The participation right and the surrender right are two major rights of the participating policy, they have the characteristics of a European option or American option respectively, which has brought difficulties to the policy pricing. Generally, insurance companies use the traditional model of multi-risk for policy pricing, not a separate analysis of the two options value, which giving the value to the policy should not be ignored. With the option method, we respectively analyses the value of the two options implied in the participating policy. It can provide new ideas and references to the calculation of the participating policy value and product pricing.In this paper, basing on Finance and the theory of Random Simulation, the participating policy value is divided into three components: the basic contract, the participation option, and the surrender option. Firstly, the investment portfolio of the participating policy fund is simulated, and its profit rate is used as the basis of the participating policy. Secondly, the path of the policy value by Monte Carlo's Random Simulation is simulated, and the simulation value of the participation option is. Then, by the post-recursive law, the value of the surrender option us simulated with the Least-Square Monte Carlo simulation approach (LSM). We have conclusions that the value of the participation option and the surrender option can not be ignored, they are impacted by the financial market, and it is appropriate to study the participating policy value with the option pricing method. Finally, as we propose, when product pricing and policy designing, according to financial analysis methods, life insurance companies must take into account the financial markets as well as the actual situation in various aspects of the companies themselves, to grasp the value of embedded options to reduce the risk and come to a company operating in good condition.