Best-Estimate Claims Reserves in Incomplete Markets

21 Pages Posted: 17 Aug 2014 Last revised: 12 Nov 2014

See all articles by Sebastian Happ

Sebastian Happ

University of Hamburg

Michael Merz

University of Hamburg

Mario V. Wuthrich

RiskLab, ETH Zurich

Date Written: August 15, 2014

Abstract

We give a rigorous definition of best-estimate reserves for insurance liabilities in a general multiperiod financial market setting. In this general multiperiod financial market setting we describe payoff spaces and optimal dynamic hedging strategies. Based on this optimal dynamic hedging strategies we define best-estimate reserves for insurance liabilities. One crucial observation is that we need the notion of optimal hedging and state-price deflators because there does not necessarily exist an equivalent probability measure under which best-estimate reserves can be calculated.

Keywords: best-estimate reserves, dynamic hedging, sequential local risk minimization, state-price deflator, incomplete market, technical provisions, risk margin

JEL Classification: G22, G13, G18, G38, D46, C59

Suggested Citation

Happ, Sebastian and Merz, Michael and Wuthrich, Mario V., Best-Estimate Claims Reserves in Incomplete Markets (August 15, 2014). Swiss Finance Institute Research Paper No. 14-64. Available at SSRN: https://ssrn.com/abstract=2480943 or http://dx.doi.org/10.2139/ssrn.2480943

Sebastian Happ

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Michael Merz

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Mario V. Wuthrich (Contact Author)

RiskLab, ETH Zurich ( email )

Department of Mathematics
Ramistrasse 101
Zurich, 8092
Switzerland

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