The Fusion of Insurance and Financial Structured Products – A Monte Carlo Valuation

We present the valuation of contracts that combine financial structured products and insurance policies - pure endowment insurance and risk insurance contracts. The embedded options in these products promise, upon exercise, the higher of either the future value of the invested fund in risk-free interest rates (which is defined in the option contract), or the future value of the fund invested in a basket of risky assets. Whereas prior literature developed mathematical expressions for continuous processes, we allow for jumps, admitting leptokurtic distributions of the risky assets stochastic processes. We solve the model numerically using Monte Carlo with parameters that are estimated via MLE from real market data and conclude with numerical examples