Loss analysis of a life insurance company applying discrete-time risk-minimizing hedging strategies
The 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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nielsen, J. Aase & Klaus Sandmann, 1995.
"Uniqueness of the Fair Premium for Equity-Linked Life Insurance Contracts,"
Discussion Paper Serie B
327, University of Bonn, Germany, revised Mar 1996.
- J. Aase Nielsen & Klaus Sandmann, 1996. "Uniqueness of the Fair Premium for Equity-Linked Life Insurance Contracts," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 21(1), pages 65-102, June.
- Aase Nielsen, J. & Sandmann, Klaus, 1995.
"Equity-linked life insurance: A model with stochastic interest rates,"
Insurance: Mathematics and Economics,
Elsevier, vol. 16(3), pages 225-253, July.
- Nielsen, J. Aase & Klaus Sandmann, 1995. "Equity-linked life insurance - a model with stochastic interest rates," Discussion Paper Serie B 291, University of Bonn, Germany, revised Mar 1995.
- Bernard, Carole & Le Courtois, Olivier & Quittard-Pinon, Francois, 2005. "Market value of life insurance contracts under stochastic interest rates and default risk," Insurance: Mathematics and Economics, Elsevier, vol. 36(3), pages 499-516, June.
- 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 637-654, May-June.
- Steinar Ekern & Svein-Arne Persson, 1996. "Exotic Unit-Linked Life Insurance Contracts," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 21(1), pages 35-63, June.
- Antje Mahayni & Erik Schlögl, 2003.
"The Risk Management of Minimum Return Guarantees,"
Research Paper Series
102, Quantitative Finance Research Centre, University of Technology, Sydney.
- An Chen & Michael Suchanecki, 2006.
"Default Risk, Bankruptcy Procedures and the Market Value of Life Insurance Liabilities,"
Bonn Econ Discussion Papers
bgse8_2006, University of Bonn, Germany.
- Chen, An & Suchanecki, Michael, 2007. "Default risk, bankruptcy procedures and the market value of life insurance liabilities," Insurance: Mathematics and Economics, Elsevier, vol. 40(2), pages 231-255, March.
- Møller, Thomas, 1998. "Risk-Minimizing Hedging Strategies for Unit-Linked Life Insurance Contracts," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 28(01), pages 17-47, May.
- Grosen, Anders & Løchte Jørgensen, Peter, 2001. "Life Insurance Liabilities at Market Value," Finance Working Papers 01-4, University of Aarhus, Aarhus School of Business, Department of Business Studies.
- Bacinello, Anna Rita & Ortu, Fulvio, 1993. "Pricing equity-linked life insurance with endogenous minimum guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 12(3), pages 245-257, June.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Föllmer, H. & Schweizer, M., 1988. "Hedging by Sequential Regression: An Introduction to the Mathematics of Option Trading," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 18(02), pages 147-160, November.
- Bacinello, Anna Rita & Ortu, Fulvio, 1993. "Pricing equity-linked life insurance with endogenous minimum guarantees : A corrigendum," Insurance: Mathematics and Economics, Elsevier, vol. 13(3), pages 303-304, December.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:42:y:2008:i:3:p:1035-1049. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.