Valuation and hedging of participating life-insurance policies under management discretion
AbstractThe valuation and hedging of participating life insurance policies, also known as with-profits policies, is considered. Such policies can be seen as European path-dependent contingent claims whose underlying security is the investment portfolio of the insurance company that sold the policy. The fair valuation of these policies is studied under the assumption that the insurance company has the right to modify the investment strategy of the underlying portfolio at any time. Furthermore, it is assumed that the issuer of the policy does not setup a separate portfolio to hedge the risk associated with the policy. Instead, the issuer will use its discretion about the investment strategy of the underlying portfolio to hedge shortfall risks. In that sense, the insurer's investment portfolio serves simultaneously as the underlying security and as the hedge portfolio. This means that the hedging problem can not be separated from the valuation problem. We investigate the relationship between risk-neutral valuation and hedging of these policies in complete and incomplete financial markets.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 44 (2009)
Issue (Month): 1 (February)
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Web page: http://www.elsevier.com/locate/inca/505554
IE54 IE10 IE43 IB13 Participating life insurance policy With-profits contract Profit-sharing Risk-neutral valuation Hedging;
Find related papers by JEL classification:
- IE5 - Health, Education, and Welfare - - - - -
- IE1 - Health, Education, and Welfare - - - - -
- IE4 - Health, Education, and Welfare - - - - -
- IB1 - Health, Education, and Welfare - - - - -
- Par - Economic Systems - - - - -
- lif - - - - - -
- ins - - - - - -
- pol - - - - - -
- Wit - - - - - -
- con - - - - - -
- Pro - Economic Systems - - - - -
- Ris - Urban, Rural, Regional, Real Estate, and Transportation Economics - - - - -
- val - - - - - -
- Hed - Public Economics - - - - -
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Insurance: Mathematics and Economics,
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- Cummins, J. David & Miltersen, Kristian R. & Persson, Svein-Arne, 2004. "International Comparison of Interest Rate Guarantees in Life Insurance," Discussion Papers 2004/18, Department of Business and Management Science, Norwegian School of Economics.
- Brennan, Michael J. & Schwartz, Eduardo S., 1976. "The pricing of equity-linked life insurance policies with an asset value guarantee," Journal of Financial Economics, Elsevier, vol. 3(3), pages 195-213, June.
- Ballotta, Laura, 2005. "A Lévy process-based framework for the fair valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 173-196, October.
- Zemp, Alexandra, 2011. "Risk comparison of different bonus distribution approaches in participating life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(2), pages 249-264, September.
- Lukasz Delong, 2010. "Applications of time-delayed backward stochastic differential equations to pricing, hedging and portfolio management," Papers 1005.4417, arXiv.org, revised Jan 2011.
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