A Full Monte Carlo Approach to the Valuation of the Surrender Option Embedded in Life Insurance Contracts

posed by Longstaff and Schwartz for the valuation of American-style contingent-claims to the case of life insurance contracts. These contracts, in fact, often embed an American-style option, called surrender option, that entitles its owner to early terminate the contract and receive a cash amount, called surrender value. The addi-tional complication arising in life insurance policies with respect to purely financial American contracts is that there is not a fixed date within which the option can be exercised, since its “maturity ” is driven by mortality factors. This complication has been handled by very few papers, often at the cost of excessively simplified valua-tion frameworks. Then the aim of this contribution, that is not a specific valuation model but a methodological approach, is to allow a full exploitation of the flexibility inborn in Monte Carlo and quasi-Monte Carlo methods in order to deal with more realistic valuation frameworks. Key words: surrender option, Least Squares Monte Carlo approach.