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Optimal strategies for hedging portfolios of unit-linked life insurance contracts with minimum death guarantee

  • Nteukam T., Oberlain
  • Planchet, Frédéric
  • Thérond, Pierre-E.

In this paper, we are interested in hedging strategies which allow the insurer to reduce the risk to their portfolio of unit-linked life insurance contracts with minimum death guarantee. Hedging strategies are developed in the Black and Scholes model and in the Merton jump-diffusion model. According to the new frameworks (IFRS, Solvency II and MCEV), risk premium is integrated into our valuations. We will study the optimality of hedging strategies by comparing risk indicators (Expected loss, volatility, VaR and CTE) in relation to transaction costs and costs generated by the re-hedging error. We will analyze the robustness of hedging strategies by stress-testing the effect of a sharp rise in future mortality rates and a severe depreciation in the price of the underlying asset.

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Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 48 (2011)
Issue (Month): 2 (March)
Pages: 161-175

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Handle: RePEc:eee:insuma:v:48:y:2011:i:2:p:161-175
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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  1. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
  2. Peter Carr & Liuren Wu, 2004. "Static Hedging of Standard Options," Finance 0409016, EconWPA.
  3. Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Laurent Deville, 2001. "Estimation des coûts de transaction sur un marché gouverné par les ordres : le cas des composantes du CAC 40," Working Papers of LaRGE Research Center 2001-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  5. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
  6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  7. 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.
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