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Financial Bounds for Insurance Claims

32 Pages Posted: 13 Oct 2011 Last revised: 11 Feb 2012

Carole Bernard

Grenoble Ecole de Management

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

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Date Written: February 9, 2012

Abstract

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 In particular we show that the discounted expected value is no longer valid as a classical lower bound for insurance prices in general, and has to be corrected by a covariance term which reflects the interaction between the insurance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

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

Carole Bernard (Contact Author)

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Steven Vanduffel

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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