CVaR pricing and hedging in Unit-Linked insurance products

This paper describes a way how to find the minimal seller’s price for a unit-linked insurance product in order to make the claim acceptable, under the assumption that information about the insurance process is only available at the time of maturity. For the general case, the price calculated here provides still an upper bound. Acceptability is defined through the CVaR criterion. Furthermore, the paper shows how to find the corresponding hedging strategy. We show how CVaR pricing is connected to earlier results of Föllmer/Leukert about minimization of Expected Shortfall, and apply and extend those results for the case of discrete insurance probabilities. We arrive at an algorithm which is straightforward and does not involve any optimization problem. For an example of a unit-linked survival insurance, we provide analytical formulas for the correspondinghedge, as well as an explicit numerical solutions for the CVaR price.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

MORE ABOUT NETSPAR


Mission en strategy           •           Network           •           Organisation           •          Magazine
Netspar Brief            •            Actionplan 2019-2023           •           Researchagenda

ABOUT NETSPAR

Our partners

B20180327_logo_PGB-Pensioendiensten_grijswaarden
B20160708_aegon
B20160708_maastricht university
B20160708_B20160615_Stichting-van-de-Arbeid-logo
B20160708_radboud
View all partners