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Utility maximization and risk minimization in life and pension insurance

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  • Peter Nielsen

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Abstract

We consider a life insurance company that seeks to optimize the pension benefits on behalf of an insured. We take the uncertain course of life of the insured explicitly into account and thus have a non-standard financial optimization problem for which we propose a two-step approach. First, according to a certain preference structure and under a certain fairness constraint, an optimal pension payment process is obtained. This leaves the company with a non-hedgeable liability, for which we then discuss two quadratic hedging approaches. We obtain general results on dividend optimization, indicating that some widely used strategies are suboptimal, and semi-explicit expressions for the optimal bonus and investment strategies. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • Peter Nielsen, 2006. "Utility maximization and risk minimization in life and pension insurance," Finance and Stochastics, Springer, vol. 10(1), pages 75-97, January.
  • Handle: RePEc:spr:finsto:v:10:y:2006:i:1:p:75-97
    DOI: 10.1007/s00780-005-0166-7
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    Cited by:

    1. Jarner, Søren Fiig & Kronborg, Morten Tolver, 2016. "Entrance times of random walks: With applications to pension fund modeling," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 1-20.
    2. Boyle, Phelim & Tian, Weidong, 2008. "The design of equity-indexed annuities," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 303-315, December.

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