32 Pages Posted: 13 Oct 2011 Last revised: 11 Feb 2012
Date Written: February 9, 2012
In this paper insurance claims are priced using an indifference pricing principle. We first revisit the traditional economic framework and then extend it to include the presence of a complete financial market. In this context we derive lower bounds for claims' prices, and these bounds correspond to the market prices of some explicitly known financial payoffs. In particular we show that the discounted expected value is no longer valid as a classical lower bound for insurance prices in general, and has to be corrected by a covariance term which reflects the interaction between the insurance claim and the financial market. The paper is illustrated by examples with equity-linked insurance contracts subject to financial and mortality risk.
Keywords: Cost-efficiency, Jensen’s inequality, Fréchet bounds, Indifference pricing
Suggested Citation: Suggested Citation
Bernard, Carole and Vanduffel, Steven, Financial Bounds for Insurance Claims (February 9, 2012). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1943513 or http://dx.doi.org/10.2139/ssrn.1943513