# Pricing insurance drawdown-type contracts with underlying L\'evy assets

## TL;DR

This paper develops models for insurance contracts based on drawdown and drawup events of assets modeled by spectrally negative Lévy processes, extending previous models and solving related exit and optimal stopping problems.

## Contribution

It introduces new insurance contracts with drawdown and drawup features for Lévy assets, including cancellation options, and provides methods to compute fair premiums and optimal stopping rules.

## Key findings

- Derived formulas for fair premiums of drawdown insurance contracts.
- Solved two-sided exit problems for spectrally negative Lévy processes.
- Identified optimal stopping strategies for contracts with cancellation features.

## Abstract

In this paper we consider some insurance policies related to drawdown and drawup events of log-returns for an underlying asset modeled by a spectrally negative geometric L\'evy process. We consider four contracts, three of which were introduced in Zhang et al. (2013) for a geometric Brownian motion. The first one is an insurance contract where the protection buyer pays a constant premium until the drawdown of fixed size of log-returns occurs. In return he/she receives a certain insured amount at the drawdown epoch. The next insurance contract provides protection from any specified drawdown with a drawup contingency. This contract expires early if a certain fixed drawup event occurs prior to the fixed drawdown. The last two contracts are extensions of the previous ones by an additional cancellation feature which allows the investor to terminate the contract earlier. We focus on two problems: calculating the fair premium $p$ for the basic contracts and identifying the optimal stopping rule for the policies with the cancellation feature. To do this we solve some two-sided exit problems related to drawdown and drawup of spectrally negative L\'evy processes, which is of independent mathematical interest. We also heavily rely on the theory of optimal stopping.