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Valuation, hedging and the risk management of insurance contracts

by Barbarin, Jérôme

Abstract (Summary)
This thesis aims at contributing to the study of the valuation of insurance liabilities and the management of the assets backing these liabilities. It consists of four parts, each devoted to a specific topic. In the first part, we study the pricing of a classical single premium life insurance contract with profit, in terms of a guaranteed rate on the premium and a participation rate on the (terminal) financial surplus. We argue that, given the asset allocation of the insurer, these technical parameters should be determined by taking explicitly into account the risk management policy of the insurance company, in terms of a risk measure such as the value-at-risk or the conditional value-at-risk. We then design a methodology that allows us to fix both parameters in such a way that the contract is fairly priced and simultaneously exhibits a risk consistent with the risk management policy. In the second part, we focus on the management of the surrender option embedded in most life insurance contracts. In Chapter 2, we argue that we should model the surrender time as a random time not adapted to the filtration generated by the financial assets prices, instead of assuming that the surrender time is an optimal stopping time as it is usual in the actuarial literature. We then study the valuation of insurance contracts with a surrender option in such a model. We here follow the financial literature on the default risk and in particular, the reduced-form models. In Chapter 3 and 4, we study the hedging strategies of such insurance contracts. In Chapter 3, we study their risk-minimizing strategies and in Chapter 4, we focus on their ``locally risk-minimizing' strategies. As a by-product, we study the impact of a progressive enlargement of filtration on the so-called ``minimal martingale measure'. The third part is devoted to the systematic mortality risk. Due to its systematic nature, this risk cannot be diversified through increasing the size of the portfolio. It is thus also important to study the hedging strategies an insurer should follow to mitigate its exposure to this risk. In Chapter 5, we study the risk-minimizing strategies for a life insurance contract when no mortality-linked financial assets are traded on the financial market. We here extend Dahl and Moller’s results and show that the risk-minimizing strategy of a life insurance contract is given by a weighted average of risk-minimizing strategies of purely financial claims, where the weights are given by the (stochastic) survival probabilities. In Chapter 6, we first study the application of the HJM methodology to the modelling of a longevity bonds market and describe a coherent theoretical setting in which we can properly define the longevity bond prices. Then, we study the risk-minimizing strategies for pure endowments and annuities portfolios when these longevity bonds are traded. Finally, the fourth part deals with the design of ALM strategies for a non-life insurance portfolio. In particular, this chapter aims at studying the risk-minimizing strategies for a non life insurance company when inflation risk and interest rate risk are taken into account. We derive the general form of these strategies when the cumulative payments of the insurer are described by an arbitrary increasing process adapted to the natural filtration of a general marked point process and when the inflation and the term structure of interest rates are simultaneously described by the HJM model of Jarrow and Yildirim. We then systematically apply this result to four specific models of insurance claims. We first study two ``collective' models. We then study two ``individual' models where the claims are notified at a random time and settled through time.
Bibliographical Information:

Advisor:

School:Université catholique de Louvain

School Location:Belgium

Source Type:Master's Thesis

Keywords:kunita watanabe decomposition minimal martingale measure longevity bonds interest rate and inflation risk enlargement of filtration surrender systematic mortality hazard process minimization marked point

ISBN:

Date of Publication:06/03/2008

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