The effect of management discretion on hedging and fair valuation of participating policies with maturity guarantees

Torsten Kleinow, Mark Willder

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

In this paper we consider how an insurer should invest in order to hedge the maturity guarantees inherent in participating policies. Many papers have considered the case where the guarantee is increased each year according to the performance of an exogenously given reference portfolio subject to some guaranteed rate. However, in this paper we will consider the more realistic case whereby the reference portfolio is replaced by the insurer's own investments which are controlled completely at the discretion of the insurer's management. Hence in our case any change in the insurer's investment strategy leads to a change in the underlying value process of the participating contract. We use a binomial tree model to show how this risk can be hedged, and hence calculate the fair value of the contract at the outset.

Original languageEnglish
Pages (from-to)445-458
Number of pages14
JournalInsurance: Mathematics and Economics
Volume40
Issue number3
DOIs
Publication statusPublished - May 2007

Keywords

  • Binomial tree model
  • Fair values
  • Hedging
  • IB10
  • IE50
  • IM30
  • Management discretion
  • Maturity guarantees
  • Participating policy

ASJC Scopus subject areas

  • Statistics, Probability and Uncertainty
  • Economics and Econometrics

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