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Insurance guaranty premiums and exchange options

Author

Listed:
  • Hangsuck Lee

    (Sungkyunkwan University)

  • Seongjoo Song

    (Korea University)

  • Gaeun Lee

    (Sungkyunkwan University)

Abstract

Insurance guaranty schemes have been adopted to compensate policyholders for losses due to the insolvency of insurance companies. We derive explicit pricing formulas for risk-based premiums to focus on insurers’ financial stability incorporating sudden changes of insurers’ liabilities and asset-liability management (ALM) risk. The pricing formula of insurance guaranty fund is derived under regulatory forbearance. To deal with the insurance guaranty funds’ payoff structure, this paper introduces new types of exchange options: early exchange options and barrier exchange options which allow multi-step boundaries. With these options, we can reflect jumps in value of underlying asset. Explicit pricing formulas are derived by using jump models with binomial approach. Also, we present sensitivity analysis on jump sizes, ALM risks and regulatory levels to provide guidance to financial authorities and insurers.

Suggested Citation

  • Hangsuck Lee & Seongjoo Song & Gaeun Lee, 2023. "Insurance guaranty premiums and exchange options," Mathematics and Financial Economics, Springer, volume 17, number 3, June.
    • Handle: RePEc:spr:mathfi:v:17:y:2023:i:1:d:10.1007_s11579-022-00326-4
    DOI: 10.1007/s11579-022-00326-4
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    References listed on IDEAS

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    Cited by:

    1. Lee, Hangsuck & Lee, Gaeun & Song, Seongjoo, 2023. "Min–max multi-step barrier options and their variants," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Insurance guaranty premiums; Exchange options; Multi-step barrier; Option pricing; Reflection principle; Esscher transform;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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