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Asset Liability Management in Insurance Company

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  • Giandomenico, Rossano

Abstract

The model, by using the option theory, determines the fair value of the policies life with different time of maturity and shows that the effective liabilities duration of an Insurance Company exposed to the default-risk is different from the duration of a default-free zero coupon bond with the same time of maturity. Furthermore, it shows that the value of equity can be immunized in a dynamic way with respect to the movement of the spot-rate by selling and purchasing the default-free bonds in the firm asset. Moreover, the equity value, by the right bond allocation, can be immunized without varying continually the weight of the bonds on the firm asset. Furthermore, it considers the surrender option and the mortally issue such that it corrects some pitfalls that are commonly encountered in the insurance industry.

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File URL: http://mpra.ub.uni-muenchen.de/16333/
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File URL: http://mpra.ub.uni-muenchen.de/18843/
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File URL: http://mpra.ub.uni-muenchen.de/40057/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16333.

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Date of creation: Jun 2006
Date of revision: Jan 2009
Handle: RePEc:pra:mprapa:16333

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Related research

Keywords: Contingent Claim; Duration; Immunization;

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References

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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  2. Briys, Eric & de Varenne, Fran├žois, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June.
  3. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  5. David F. Babbel & Craig Merrill, 1997. "Economic Valuation Models for Insurers," Center for Financial Institutions Working Papers 97-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
  7. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
  8. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
  9. Geske, Robert & Johnson, Herb E, 1984. " The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-24, December.
  10. Giandomenico, Rossano, 2006. "Martingale Model," MPRA Paper 21973, University Library of Munich, Germany.
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Cited by:
  1. Giandomenico, Rossano, 2008. "Valuing Coupon Bond Linked to Variable Interest Rate," MPRA Paper 21974, University Library of Munich, Germany.

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