infonet-economy

Most life insurance contracts embed the right to stop premium payments during the term of the contract (paid-up option). Thereby, the contract is not terminated but continues with reduced benefits and often provides the right to resume premium payments later,
thus reincreasing the previously reduced benefits (resumption option). In our analysis, we start with a basic contract with two standard options, namely, an interest-rate guarantee and cliquet-style annual surplus participation. Next, we include, in addition to the
features of the basic contract, a paid-up and resumption option in the framework. We do not base our pricing on assumptions about particular exercise strategies, but instead assess the risk potential by providing an upper bound to the option price which is independent
of the policyholder's exercise behavior. This approach provides important information to the insurer about the potential hazard of offering the paid-up and resumption option. Further, the approach allows an analysis of the impact of guaranteed interest rate, annual surplus participation, and investment volatility on the values of the premium payment options.