Valuation and hedging of participating life-insurance policies under management discretion
The 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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- Pelsser, Antoon, 2003. "Pricing and hedging guaranteed annuity options via static option replication," Insurance: Mathematics and Economics, Elsevier, vol. 33(2), pages 283-296, October.
- Andrea Consiglio & Flavio Cocco & Stavros A. Zenios, 2001.
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Center for Financial Institutions Working Papers
00-41, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Consiglio, Andrea & Cocco, Flavio & Zenios, Stavros A., 2008. "Asset and liability modelling for participating policies with guarantees," European Journal of Operational Research, Elsevier, vol. 186(1), pages 380-404, April.
- Knut Aase & Svein-Arne Persson, 1996. "Valuation of the Minimum Guaranteed Return Embedded in Life Insurance Products," Center for Financial Institutions Working Papers 96-20, Wharton School Center for Financial Institutions, University of Pennsylvania.
- 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.
- 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.
- 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.
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