Research on Universal Life Insurance Pricing under Stochastic Interest Rates and the Ornstein-Uhlenbeck Process

DOI: https://doi.org/10.62517/jse.202611109

Author(s)

Zhanshuo Zhang

Affiliation(s)

School of Finance, Nankai University, Tianjin, China

Abstract

Universal life insurance typically consists of two components: a protection account and an investment account. The protection account is established to cover insurance liabilities and is used to pay risk charges and claim benefits. The investment account, funded by premiums paid by policyholders, is managed by the insurer for investment purposes in order to achieve asset appreciation. Within this framework, this paper assumes that the asset value of the investment account follows an exponential Ornstein–Uhlenbeck (O-U) process, while the risk-free interest rate follows the Vasicek stochastic interest rate model. A pricing model for universal life insurance is then developed under a stochastic interest rate environment. Since the value structure of the investment account exhibits characteristics of an embedded option, it can be regarded as an embedded option pricing problem. By combining actuarial pricing methods with option pricing theory, this study analyzes the pricing mechanism of universal life insurance products without relying on the assumption of a complete market, aiming to provide theoretical support for product design and risk management.

Keywords

Universal Insurance; O-U Process; Random Interest Rate; Insurance Actuarial Method

References

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