Measurement of Insurance Liabilities for Contracts That Include Surrender Option

This paper is focused on the valuation of life insurance liabilities for policies with embedded surrender option. Taking into account the current process of intensive formation of the Russian life insurance market, it is interesting to study the fundamental principles of the activities of insurance companies. Two main sections can be identified. In the first one there is presented an overview of existing surrender activity models. An important additional component of this section is the empirical analysis of the dependence between surrender rates and macroeconomic variables according to the Russian market. The obtained results support the Emergency Fund Hypothesis and the Interest Rate Hypothesis. In the second section there are described the methods of valuing liabilities that arise from surrender option. The paper takes evaluating liability value for surrender option applying asset pricing theory under the assumption that the policyholders are perfectly rational. Finally, the numerical implementation for two approaches (European and American put option) allows to compare them and provide recommendations for the practical implementation of these methods.