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Exotic Unit-Linked Life Insurance Contracts

Author

Listed:
  • Steinar Ekern

    (Norwegian School of Economics and Business Administration, Institute of Finance and Management Science, Helleveien 30, N-5035 Bergen-Sandviken Norway)

  • Svein-Arne Persson

    (Norwegian School of Economics and Business Administration, Institute of Finance and Management Science, Helleveien 30, N-5035 Bergen-Sandviken Norway)

Abstract

This article integrates aspects of traditional insurance with advances in financial economics, yielding proper valuation and premium assessments of insurance benefits linked to various financial assets. Several new types of unit-linked life insurance contracts are discussed, with substantial potential for real-life applications. Compared to usual unit-linked products, these contracts offer added flexibility and/or altered exposure to financial risk for the insured and/or the insurer. The single premiums of these policies are calculated as expectations under a risk-adjusted probability measure (equivalent martingale measure), satisfying no-arbitrage conditions in financial markets. The Geneva Papers on Risk and Insurance Theory (1996) 21, 35–63. doi:10.1007/BF00949050

Suggested Citation

  • 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.
  • Handle: RePEc:pal:genrir:v:21:y:1996:i:1:p:35-63
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    References listed on IDEAS

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    Cited by:

    1. Melnikov, Alexander & Romaniuk, Yulia, 2006. "Evaluating the performance of Gompertz, Makeham and Lee-Carter mortality models for risk management with unit-linked contracts," Insurance: Mathematics and Economics, Elsevier, vol. 39(3), pages 310-329, December.
    2. Nielsen, J. Aase & Sandmann, Klaus & Schlögl, Erik, 2011. "Equity-linked pension schemes with guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 547-564.
    3. Chen, An, 2008. "Loss analysis of a life insurance company applying discrete-time risk-minimizing hedging strategies," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 1035-1049, June.
    4. Klusik Przemyslaw, 2014. "Hedging of equity-linked with maximal success factor," Papers 1405.0732, arXiv.org.
    5. Virginia R. Young, 2004. "Pricing In An Incomplete Market With An Affine Term Structure," Mathematical Finance, Wiley Blackwell, vol. 14(3), pages 359-381.
    6. 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.
    7. Tanskanen, Antti Juho & Lukkarinen, Jani, 2003. "Fair valuation of path-dependent participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 33(3), pages 595-609, December.
    8. Steffensen, Mogens, 2000. "A no arbitrage approach to Thiele's differential equation," Insurance: Mathematics and Economics, Elsevier, vol. 27(2), pages 201-214, October.
    9. Eckhard Platen, 2009. "Real World Pricing of Long Term Contracts," Research Paper Series 262, Quantitative Finance Research Centre, University of Technology, Sydney.
    10. Guillen, Montserrat & Jorgensen, Peter Lochte & Nielsen, Jens Perch, 2006. "Return smoothing mechanisms in life and pension insurance: Path-dependent contingent claims," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 229-252, April.
    11. Chen, An, 2008. "Loss analysis of a life insurance company applying discrete-time risk-minimizing hedging strategies," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 1035-1049, June.
    12. Gan, Guojun, 2013. "Application of data clustering and machine learning in variable annuity valuation," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 795-801.
    13. Bjarke Jensen & Peter Løchte Jørgensen & Anders Grosen, 2001. "A Finite Difference Approach to the Valuation of Path Dependent Life Insurance Liabilities," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 26(1), pages 57-84, June.
    14. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    15. Branger, Nicole & Mahayni, Antje & Schneider, Judith C., 2010. "On the optimal design of insurance contracts with guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 485-492, June.
    16. Kolkiewicz, A. W. & Tan, K. S., 2006. "Unit-Linked Life Insurance Contracts with Lapse Rates Dependent on Economic Factors," Annals of Actuarial Science, Cambridge University Press, vol. 1(01), pages 49-78, March.
    17. Kevin Fergusson & Eckhard Platen, 2013. "Real World Pricing of Long Term Cash-Linked Annuities and Equity-Linked Annuities with Cash-Linked Guarantees," Research Paper Series 338, Quantitative Finance Research Centre, University of Technology, Sydney.
    18. Alexander Melnikov & Yuliya Romanyuk, 2008. "Efficient Hedging And Pricing Of Equity-Linked Life Insurance Contracts On Several Risky Assets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 295-323.
    19. Yang, Sharon S. & Yueh, Meng-Lan & Tang, Chun-Hua, 2008. "Valuation of the interest rate guarantee embedded in defined contribution pension plans," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 920-934, June.
    20. Klusik, Przemyslaw & Palmowski, Zbigniew, 2011. "Quantile hedging for equity-linked contracts," Insurance: Mathematics and Economics, Elsevier, vol. 48(2), pages 280-286, March.
    21. Melnikov, Alexander & Tong, Shuo, 2014. "Quantile hedging on equity-linked life insurance contracts with transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 77-88.
    22. Melnikov, Alexander & Tong, Shuo, 2014. "Valuation of finance/insurance contracts: Efficient hedging and stochastic interest rates modeling," Risk and Decision Analysis, IOS Press, issue 5, pages 23-41.

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