Loss analysis of a life insurance company applying discrete-time risk-minimizing hedging strategies
AbstractThe present paper investigates the net loss of a life insurance company issuing equity-linked pure endowments in the case of periodic premiums. Due to the untradability of the insurance risk which affects both the in- and outflow side of the company, the issued insurance claims cannot be hedged perfectly. Furthermore, we consider an additional source of incompleteness caused by trading restrictions, because in reality the hedging of the contingent claims is more likely to occur at discrete times. Based on Møller [Møller, T., 1998. Risk-minimizing hedging strategies for unit-linked life insurance contracts. Astin Bull. 28, 17-47], we particularly examine the situation, where the company applies a time-discretized risk-minimizing hedging strategy. Through an illustrative example, we observe numerically that only a relatively small reduction in ruin probabilities is achieved with the use of the discretized originally risk-minimizing strategy because of the accumulated extra duplication errors caused by discretizing. However, the simulated results are highly improved if the hedging model instead of the hedging strategy is discretized. For this purpose, Møller's [Møller, T., 2001. Hedging equity-linked life insurance contracts. North Amer. Actuarial J. 5 (2), 79-95] discrete-time (binomial) risk-minimizing strategy is adopted.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 42 (2008)
Issue (Month): 3 (June)
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Web page: http://www.elsevier.com/locate/inca/505554
Other versions of this item:
- An Chen, 2005. "Loss Analysis of a Life Insurance Company Applying Discrete-time Risk-minimizing Hedging Strategies," Bonn Econ Discussion Papers bgse19_2005, University of Bonn, Germany.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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