VALUATION OF GUARANTEED EQUITY-LINKED LIFE INSURANCE UNDER REGIME-SWITCHING MODELS

This paper is concerned with the valuation of guaranteed equity-linked life insurance. The underlying reference equity fund and interest rate are dictated by a set of diffusions coupled by a finite state Markov chain. Two approaches are developed for pricing European options that are embedded in the life insurance contracts. The first approach involves a discounted characteristic function and inversion of Fourier transform. The second approach follows a Monte-Carlo simulation technique. These two approaches together with a bond valuation procedure are used to determine the fair value of the guaranteed equity-linked life insurance contracts. Finally, numerical examples are provided to illustrate the results.