A lattice based model for pricing equity-linked policies

We propose a lattice based model for computing the fair premiums of equity-linked policies with or without embedded surrender options. The model is based on a binomial lattice describing the evolution of the reference fund value where the periodical deemed contributions are invested. Since we consider the case of periodical premiums, the lattice is not recombining. In order to avoid that the evaluation process becomes computationally unmanageable, the model considers sets of representatives values of the reference fund associated to each node of the tree. Then, the usual backward induction technique coupled with linear interpolations allows to define a simple and efficient method to compute the fair periodical premiums.