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

Published online by Cambridge University Press:  29 August 2014

Thomas Møller
Thomas Møller*
Affiliation:
Laboratory of Actuarial Mathematics, University of Copenhagen
*
Laboratory of Actuarial Mathematics, Universitetsparken5, DK-2100 Copenhagen Ø, DenmarkE-mail:[email protected]
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Abstract

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A 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.

Keywords

Incomplete marketMartingale representationMinimal martingale measureIntrinsic riskReinsurance
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 28 , Issue 1 , May 1998 , pp. 17 - 47
Copyright
Copyright © International Actuarial Association 1998

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