Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences

By applying the principle of equivalent forward preferences, this paper revisits the pricing and hedging problems for equity-linked life insurance contracts. The equity-linked contingent claim depends on, not only the future lifetime of the policyholder, but also the performance of the reference por...

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Bibliographic Details
Published inInsurance, mathematics & economics Vol. 88; pp. 93 - 107
Main Author Chong, Wing Fung
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.09.2019
Elsevier Sequoia S.A
Subjects
Contracts
Differential equations
Equity-linked life insurance
Equivalence
Financial market
Forward utility preferences
Hedging
Indifference approach
Insurance
Insurance (contracts)
Life insurance
Policyholders
Prices
Pricing
Pricing and hedging
Pricing policies
Random horizon BSDEs
Volatility
Random horizon BSDEs
Pricing and hedging
G22
Indifference approach
Forward utility preferences
Equity-linked life insurance
C61
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Summary:By applying the principle of equivalent forward preferences, this paper revisits the pricing and hedging problems for equity-linked life insurance contracts. The equity-linked contingent claim depends on, not only the future lifetime of the policyholder, but also the performance of the reference portfolio in the financial market for the segregated account of the policyholder. For both zero volatility and non-zero volatility forward utility preferences, prices and hedging strategies of the contract are represented by solutions of random horizon backward stochastic differential equations. Numerical illustration is provided for the zero volatility case. The derived prices and hedging strategies are also compared with classical results in the literature.
ISSN:0167-6687
1873-5959
DOI:10.1016/j.insmatheco.2019.06.003