Discontinuous Hedging Strategies for Multi‐period Guarantees in Life Insurance
Abstract
In the past, life insurance companies were mainly exposed to mortality risk, a risk they in principle could diversify by issuing a large number of similar and statistically independent policies. However, as more exotic life insurance policies have been offered, such as unit‐linked life insurance contracts and policies with bonus mechanisms and minimum rate of return guarantees, life insurance companies have also become exposed to financial risk. The financial risk is non‐diver‐sifiable and is likely to affect many, if not most, of the companies outstanding policies in the same direction. Although it is non‐diversifiable, the financial risk is (at least to some extent) hedgeable. Since the accumulated exposure to financial risk over all the policies issued by a life insurance company can be large, it is important that this risk be hedged so that the company is able to meet its obligations to the policyholders.
Citation
LINDSET, S. (2003), "Discontinuous Hedging Strategies for Multi‐period Guarantees in Life Insurance", Journal of Risk Finance, Vol. 5 No. 1, pp. 51-63. https://doi.org/10.1108/eb022979
Publisher
:MCB UP Ltd
Copyright © 2003, MCB UP Limited