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One of the risks derived from selling long term policies that any insurancecompany has, arises from interest rates. In this paper we consider a generalclass of stochastic volatility models written in forward variance form. We alsodeal with stochastic interest rates to obtain the risk-free price forunit-linked life insurance contracts, as well as providing a perfect hedgingstrategy by completing the market. We conclude with a simulation experiment,where we price unit-linked policies using Norwegian mortality rates. Inaddition we compare prices for the classical Black-Scholes model against theHeston stochastic volatility model with a Vasicek interest rate model.

Variance and interest rate risk in unit-linked insurance policies