Unit-linked Life Insurance Contracts Research Articles

On Valuation and Risk Management at the Interface of Insurance and Finance

ABSTRACTThis paper reviews methods for hedging and valuation of insurance claims with an inherent financial risk, with special emphasis on quadratic hedging approaches and indifference pricing principles and their applications in insurance. It thus addresses aspects of the interplay between finance and insurance, an area which has gained considerable attention during the past years, in practice as well as in theory. Products combining insurance risk and financial risk have gained considerable market shares. Special attention is paid to unit-linked life insurance contracts, and it is demonstrated how these contracts can be valued and hedged by using traditional methods as well as more recent methods from incomplete financial markets such as risk-minimisation, mean-variance hedging, super-replication and indifference pricing with mean-variance utility functions.

On transformations of actuarial valuation principles

In this paper, we determine optimal trading strategies associated with the financial variance and standard deviation principles proposed by Schweizer [2001. Insurance: Mathematics and Economics 28, 31–47]. These principles take into consideration the possibilities of hedging on the financial market and are derived by an indifference argument, which embeds the traditional (actuarial) variance and standard deviation principles in a financial framework. We also investigate an alternative way of transforming actuarial principles and show that for the standard deviation principle this leads to the financial standard deviation principle. The principles are applied for the valuation and hedging of unit-linked life insurance contracts.

Exotic Unit-Linked Life Insurance Contracts

This article integrates aspects of traditional insurance with advances in financial economics, yielding proper valuation and premium assessments of insurance benefits linked to various financial assets. Several new types of unit-linked life insurance contracts are discussed, with substantial potential for real-life applications. Compared to usual unit-linked products, these contracts offer added flexibility and/or altered exposure to financial risk for the insured and/or the insurer. The single premiums of these policies are calculated as expectations under a risk-adjusted probability measure (equivalent martingale measure), satisfying no-arbitrage conditions in financial markets.