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Robust asymptotic insurance-finance arbitrage

Author

Listed:
  • Katharina Oberpriller
  • Moritz Ritter
  • Thorsten Schmidt

Abstract

In most cases, insurance contracts are linked to the financial markets, such as through interest rates or equity-linked insurance products. To motivate an evaluation rule in these hybrid markets, Artzner et al. (2022) introduced the notion of insurance-finance arbitrage. In this paper we extend their setting by incorporating model uncertainty. To this end, we allow statistical uncertainty in the underlying dynamics to be represented by a set of priors $\mathscr{P}$. Within this framework we introduce the notion of robust asymptotic insurance-finance arbitrage and characterize the absence of such strategies in terms of the concept of ${Q}\mathscr{P}$-evaluations. This is a nonlinear two-step evaluation which guarantees no robust asymptotic insurance-finance arbitrage. Moreover, the ${Q}\mathscr{P}$-evaluation dominates all two-step evaluations as long as we agree on the set of priors $\mathscr{P}$ which shows that those two-step evaluations do not allow for robust asymptotic insurance-finance arbitrages. Furthermore, we introduce a doubly stochastic model under uncertainty for surrender and survival. In this setting, we describe conditional dependence by means of copulas and illustrate how the ${Q}\mathscr{P}$-evaluation can be used for the pricing of hybrid insurance products.

Suggested Citation

  • Katharina Oberpriller & Moritz Ritter & Thorsten Schmidt, 2022. "Robust asymptotic insurance-finance arbitrage," Papers 2212.04713, arXiv.org.
    • Handle: RePEc:arx:papers:2212.04713
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    References listed on IDEAS

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    1. Sara Biagini & Bruno Bouchard & Constantinos Kardaras & Marcel Nutz, 2017. "Robust Fundamental Theorem For Continuous Processes," Mathematical Finance, Wiley Blackwell, vol. 27(4), pages 963-987, October.
    2. Dhaene, Jan & Stassen, Ben & Barigou, Karim & Linders, Daniël & Chen, Ze, 2017. "Fair valuation of insurance liabilities: Merging actuarial judgement and market-consistency," Insurance: Mathematics and Economics, Elsevier, vol. 76(C), pages 14-27.
    3. Irene Klein, 2000. "A Fundamental Theorem of Asset Pricing for Large Financial Markets," Mathematical Finance, Wiley Blackwell, vol. 10(4), pages 443-458, October.
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