Pricing equity-linked life insurance policies using stochastic interest rate models
We analyzed pricing of index-linked life insurance policies using stochastic interest rate. We analyzed insurer's risk of index linked life insurance policies using the equivalence principle and applied an insurance pricing model that builds on the framework of European put options. We looked at how changes in interest rates and changes in the prices of the reference portfolio affect the premium charged in index-linked policies. The geometric Brownian motion model which follows a log-normal process was used to forecast future prices of the reference portfolio while a Vasicek process was used 0 forecast the future interest rates. The analysis confirmed that the present value of premium charged was very sensitive to the processes of the reference portfolio value and interest rates.