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Efficient Hedging Methodology Applied to Equity-Linked Life Insurance

Title:

Efficient Hedging Methodology Applied to Equity-Linked Life Insurance

Melnikov, Alexander and Skornyakova, Victoria (2005) Efficient Hedging Methodology Applied to Equity-Linked Life Insurance. Technical Report. Concordia University. Department of Mathematics & Statistics, Montreal, Quebec.

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Abstract

In this paper we study efficient hedging and its applications to the pricing of equitylinked life insurance contracts. We devote our attention to the pure endowment contracts with a flexible guarantee. In our setting, these insurance instruments are based on two risky assets of the market controlled by the Black-Scholes model during the contract period. The first asset is responsible for the maximal size of future profit while the second provides a flexible guarantee for the insured.
The insurance company is considered as a hedger of a maximum of two risky assets as a contingent claim in this market. The contract is exercised if the insured is still alive at the maturity time and cannot be perfectly hedged in view of a positive survival probability of a client. To provide an appropriate risk-management in connection of such a contract, the company should exploit some imperfect hedging forms. Here we propose the use of efficient hedging with a power loss function.
Specifying developments in this area, we create the pricing methodology for the insurance contracts under consideration in terms of a generalized Margrabe’s formula.
The results are illustrated by a numerical actuarial analysis with the indices Russell 2000
and Dow Jones Industrial Average.

Divisions:Concordia University > Faculty of Arts and Science > Mathematics and Statistics
Item Type:Monograph (Technical Report)
Authors:Melnikov, Alexander and Skornyakova, Victoria
Series Name:Department of Mathematics & Statistics. Technical Report No. 1/05
Corporate Authors:Concordia University. Department of Mathematics & Statistics
Institution:Concordia University
Date:February 2005
Keywords:equity-linked life insurance, efficient hedging, flexible guarantee, pure endowment, Margrabe’s formula.
ID Code:6665
Deposited By:DIANE MICHAUD
Deposited On:02 Jun 2010 12:31
Last Modified:08 Dec 2010 18:23
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