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Financial Bounds for Insurance Claims

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  • Carole Bernard
  • Steven Vanduffel

Abstract

type="main" xml:lang="en"> In this article, insurance claims are priced using an indifference pricing principle. We first revisit the traditional economic framework and then extend it to incorporate a financial (sub)market as a tool to invest and to (partially) hedge. In this context, we derive lower bounds for claims' prices, and these bounds correspond to the market prices of some explicitly known financial payoffs. In particular, we show that the discounted expected value is no longer valid as a classical lower bound for insurance prices in general: it has to be corrected by a covariance term that reflects the interaction between the insurance claim and the financial market. Examples that deal with equity-linked insurance contracts illustrate the article.

Suggested Citation

  • Carole Bernard & Steven Vanduffel, 2014. "Financial Bounds for Insurance Claims," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(1), pages 27-56, March.
    • Handle: RePEc:bla:jrinsu:v:81:y:2014:i:1:p:27-56
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    Cited by:

    1. Bernard, Carole & Vanduffel, Steven & Ye, Jiang, 2019. "A new efficiency test for ranking investments: Application to hedge fund performance," Economics Letters, Elsevier, vol. 181(C), pages 203-207.
    2. Zheng, Jiakun, 2020. "Optimal insurance design under narrow framing," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 596-607.
    3. Carole Bernard & Franck Moraux & Ludger R�schendorf & Steven Vanduffel, 2015. "Optimal payoffs under state-dependent preferences," Quantitative Finance, Taylor & Francis Journals, vol. 15(7), pages 1157-1173, July.
    4. Zheng-wen Wang & Ling Tian, 2016. "How much catastrophe insurance fund needed in China for the ‘big one’? An estimation with comonotonicity method," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 84(1), pages 55-68, October.
    5. Bernard, Carole & Chen, Jit Seng & Vanduffel, Steven, 2015. "Rationalizing investors’ choices," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 10-23.
    6. Jiakun Zheng, 2020. "Optimal insurance design under narrow framing," Post-Print hal-04227370, HAL.
    7. Bernard, Carole & Liu, Fangda & Vanduffel, Steven, 2020. "Optimal insurance in the presence of multiple policyholders," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 638-656.

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