  We study the modelling and valuation of surrender and other behavioural
options in life insurance and pension. We place ourselves in between the two
extremes of completely arbitrary intervention and optimal intervention by the
policyholder. We present a method that is based on differential equations and
that can be used to approximate contract values when policyholders exhibit
optimal behaviour. This presentation includes a specification of sufficient
conditions for both consistency of the model and convergence of the contract
values. When not going to the limit in the approximation we obtain a technique
for balancing off arbitrary and optimal behaviour in a simple, intuitive way.
This leads to our suggestions for intervention models where one single
parameter reflects the extent of rationality among policyholders. In a series
of numerical examples we illustrate the impact of the rationality parameter on
the contract values.
