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On the hedging of liabilities with an endogenous profit sharing mechanism

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  • Frédéric Sart

    (Risk Management - Delta Lloyd Life)

Abstract

The fair replication method is a method designed to value liabilities with an endogenous profit sharing mechanism, i.e. based on the book yield of the backing assets. The basic idea is to construct a hypothetical portfolio, the fair replicating portfolio (FRP), whose cash flows are scenario-invariant. The method is a computationally efficient alternative to traditional stochastic modeling. It may be particularly useful in applications where extensive calculations of best estimate of liabilities are required.

Suggested Citation

  • Frédéric Sart, 2016. "On the hedging of liabilities with an endogenous profit sharing mechanism," Post-Print hal-01574949, HAL.
    • Handle: RePEc:hal:journl:hal-01574949
    Note: View the original document on HAL open archive server: https://hal.science/hal-01574949
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    References listed on IDEAS

    as
    1. Kleinow, Torsten & Willder, Mark, 2007. "The effect of management discretion on hedging and fair valuation of participating policies with maturity guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 40(3), pages 445-458, May.
    2. Kleinow, Torsten, 2009. "Valuation and hedging of participating life-insurance policies under management discretion," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 78-87, February.
    3. repec:eme:jrfpps:v:14:y:2013:i:2:p:392-413 is not listed on IDEAS
    4. Bauer, Daniel & Kiesel, Rudiger & Kling, Alexander & Ru[ss], Jochen, 2006. "Risk-neutral valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 171-183, October.
    5. Bacinello, Anna Rita, 2001. "Fair Pricing of Life Insurance Participating Policies with a Minimum Interest Rate Guaranteed," ASTIN Bulletin, Cambridge University Press, vol. 31(2), pages 275-297, November.
    6. Martin Eling & Michael Kochanski, 2013. "Research on lapse in life insurance: what has been done and what needs to be done?," Journal of Risk Finance, Emerald Group Publishing, vol. 14(4), pages 392-413, August.
    7. Łukasz Delong, 2010. "Applications of backward stochastic differential equations to insurance and finance," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 21, pages 11-26.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Best estimate of liabilities; Life insurance; Profit sharing mechanism; Replicating portfolio; Solvency II;
    All these keywords.

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