Valuation of the surrender option in unit-linked life insurance policies in a non-rational behaviour framework

In this article we propose a discrete time-based model for the evaluation of the surrender option implicit in a portfolio of single premium unit-linked life policies. We presume that the policyholders do not act rationally. Their behaviour is linked to the credibility of the insurance companies, to the analysis of the economic convenience of a rating agency, as well as to their personal needs for surrenders. In this paper we investigate the effects of a company's advertising campaign on the price of surrender options. The model was numerically implemented using the Cox et al. [Cox, J.C., Ross, S.A., Rubinstein, M., 1979. Option Pricing: A Simplified Approach. Journal of Financial Economics 7, 229-263] binomial model.