scholarly journals Optimal Hedging and Pricing of Equity-Linked Life Insurance Contracts in a Discrete-Time Incomplete Market

2011 ◽  
Vol 2011 ◽  
pp. 1-23
Author(s):  
Norman Josephy ◽  
Lucia Kimball ◽  
Victoria Steblovskaya
Keyword(s):  
Financial Market ◽  
Discrete Time ◽  
Life Insurance ◽  
Incomplete Market ◽  
Insurance Contract ◽  
Fair Price ◽  
Hedging Strategy ◽  
Insurance Contracts ◽  
Risk Return ◽  
Optimal Hedging

We present a method of optimal hedging and pricing of equity-linked life insurance products in an incomplete discrete-time financial market. A pure endowment life insurance contract with guarantee is used as an example. The financial market incompleteness is caused by the assumption that the underlying risky asset price ratios are distributed in a compact interval, generalizing the assumptions of multinomial incomplete market models. For a range of initial hedging capitals for the embedded financial option, we numerically solve an optimal hedging problem and determine a risk-return profile of each optimal non-self-financing hedging strategy. The fair price of the insurance contract is determined according to the insurer's risk-return preferences. Illustrative numerical results of testing our algorithm on hypothetical insurance contracts are documented. A discussion and a test of a hedging strategy recalibration technique for long-term contracts are presented.

scholarly journals Locally Risk-minimizing Hedging of Insurance Payment Streams

2007 ◽  
Vol 37 (1) ◽  
pp. 67-91 ◽  
Author(s):  
Martin Riesner
Keyword(s):  
Financial Market ◽  
Life Insurance ◽  
Levy Process ◽  
Contingent Claim ◽  
Risk Minimization ◽  
Hedging Strategy ◽  
Insurance Contracts ◽  
Insurance Payment ◽  
Local Risk ◽  
Martingale Case

For the martingale case Föllmer and Sondermann (1986) introduced a unique admissible risk-minimizing hedging strategy for any square-integrable contingent claim H. Schweizer (1991) developed their theory further to the semimartingale case introducing the notion of local risk-minimization. Møller (2001) extended the theory of Föllmer and Sondermann (1986) to hedge general payment processes occurring mainly in insurance. We expand local risk-minimization to the theory of hedging general payment processes and derive such a hedging strategy for general unit-linked life insurance contracts in a general Lévy process financial market.

scholarly journals The IFRS 17 contractual service margin: a life insurance perspective

2021 ◽  
Vol 26 ◽  
Author(s):  
W. Yousuf ◽  
J. Stansfield ◽  
K. Malde ◽  
N. Mirin ◽  
R. Walton ◽  
...  
Keyword(s):  
Life Insurance ◽  
Market Value ◽  
Financial Statements ◽  
Insurance Contract ◽  
Accounting Standard ◽  
Insurance Contracts ◽  
Ifrs 4 ◽  
Insurance Perspective ◽  
To Come

Abstract IFRS 17 Insurance Contracts is a new accounting standard currently expected to come into force on 1 January 2023. It supersedes IFRS 4 Insurance Contracts. IFRS 17 establishes key principles that entities must apply in all aspects of the accounting of insurance contracts. In doing so, the Standard aims to increase the usefulness, comparability, transparency and quality of financial statements. A fundamental concept introduced by IFRS 17 is the contractual service margin (CSM). This represents the unearned profit that an entity expects to earn as it provides services. However, as a principles-based standard, IFRS 17 results in entities having to apply significant judgement when determining the inputs, assumptions and techniques it uses to determine the CSM at each reporting period. In general, the Standard resolves broad categories of mismatches which arise under IFRS 4. Notable examples include mismatches between assets recorded at current market value and liabilities calculated using fixed discount rates as well as inconsistencies in the timing of profit recognition over the duration of an insurance contract. However, there are requirements of IFRS 17 that may create economic or accounting mismatches of its own. For example, new mismatches could arise between the measurement of underlying contracts and the corresponding reinsurance held. Additionally, mismatches can still arise between the measurement of liabilities and the assets that support the liabilities. This paper explores the technical, operational and commercial issues that arise across these and other areas focusing on the CSM. As a standard that is still very much in its infancy, and for which wider consensus on topics is yet to be achieved, this paper aims to provide readers with a deeper understanding of the issues and opportunities that accompany it.

scholarly journals Reflexiones sobre el anteproyecto de ley de contrato de seguro y la designación del beneficiario en el seguro sobre la vida = Reflections on the draft law on the insurance contract and beneficiary designation in on life insurance

2012 ◽  
pp. 145
Author(s):  
María Angustias Díaz Gómez ◽  
Carlos Miguélez del Río ◽  
Elicio Díaz Gómez
Keyword(s):  
Life Insurance ◽  
Insurance Contract ◽  
Insurance Contracts

<p>En este trabajo se analiza el Anteproyecto de Ley español de Contrato de Seguro, de 8 de abril de 2011, centrándonos en las novedades más significativas que contiene, en el ámbito de los Seguros de las personas, en el seguro sobre la vida y, de un modo más específico, respecto al beneficiario.</p><p>This paper analyzes the Spanish Draft Law on Insurance Contracts (<em>Anteproyecto de Ley de Contrato de Seguro</em>), dated April 8, 2011, focusing on the most significant developments that contains, in the field of insurance of persons, in life insurance, and in a more specific regard to the insurance beneficiary</p>

scholarly journals Risk-Minimizing Hedging Strategies for Unit-Linked Life Insurance Contracts

1998 ◽  
Vol 28 (1) ◽  
pp. 17-47 ◽  
Author(s):  
Thomas Møller
Keyword(s):  
Financial Market ◽  
Life Insurance ◽  
Trading Strategies ◽  
Risk Minimization ◽  
Change Of Measure ◽  
Insurance Benefits ◽  
Insurance Contracts ◽  
Hedging Strategies ◽  
Different Types ◽  
Risk Processes

AbstractA unit-linked life insurance contract is a contract where the insurance benefits depend on the price of some specific traded stocks. We consider a model describing the uncertainty of the financial market and a portfolio of insured individuals simultaneously. Due to incompleteness the insurance claims cannot be hedged completely by trading stocks and bonds only, leaving some risk to the insurer. The theory of risk-minimization is briefly reviewed and applied after a change of measure. Risk-minimizing trading strategies and the associated intrinsic risk processes are determined for different types of unit-linked contracts. By extending the model to the situation where certain reinsurance contracts on the insured lives are traded, the direct insurer can eliminate the risk completely. The corresponding self-financing strategies are determined.

VAR-BASED OPTIMAL PARTIAL HEDGING

2013 ◽  
Vol 43 (3) ◽  
pp. 271-299 ◽  
Author(s):  
Jianfa Cong ◽  
Ken Seng Tan ◽  
Chengguo Weng
Keyword(s):  
Financial Market ◽  
Value At Risk ◽  
Risk Measure ◽  
Market Model ◽  
Risk Exposure ◽  
Hedging Strategy ◽  
Quantile Hedging ◽  
Hedging Strategies ◽  
Optimal Hedging ◽  
Partial Hedging

AbstractHedging is one of the most important topics in finance. When a financial market is complete, every contingent claim can be hedged perfectly to eliminate any potential future obligations. When the financial market is incomplete, the investor may eliminate his risk exposure by superhedging. In practice, both hedging strategies are not satisfactory due to their high implementation costs, which erode the chance of making any profit. A more practical and desirable strategy is to resort to the partial hedging, which hedges the future obligation only partially. The quantile hedging of Föllmer and Leukert (Finance and Stochastics, vol. 3, 1999, pp. 251–273), which maximizes the probability of a successful hedge for a given budget constraint, is an example of the partial hedging. Inspired by the principle underlying the partial hedging, this paper proposes a general partial hedging model by minimizing any desirable risk measure of the total risk exposure of an investor. By confining to the value-at-risk (VaR) measure, analytic optimal partial hedging strategies are derived. The optimal partial hedging strategy is either a knock-out call strategy or a bull call spread strategy, depending on the admissible classes of hedging strategies. Our proposed VaR-based partial hedging model has the advantage of its simplicity and robustness. The optimal hedging strategy is easy to determine. Furthermore, the structure of the optimal hedging strategy is independent of the assumed market model. This is in contrast to the quantile hedging, which is sensitive to the assumed model as well as the parameter values. Extensive numerical examples are provided to compare and contrast our proposed partial hedging to the quantile hedging.

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