On the (In-)Dependence between Financial and Actuarial Risks

23 Pages Posted: 4 Sep 2014

See all articles by Jan Dhaene

Jan Dhaene

Katholieke Universiteit Leuven

Alexander Kukush

Taras Shevchenko National University of Kyiv

Elisa Luciano

University of Turin - Department of Statistics and Applied Mathematics

Wim Schoutens

KU Leuven - Department of Mathematics

Ben Stassen

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: June 20, 2013

Abstract

Probability statements about future evolutions of financial and actuarial risks are expressed in terms of the ‘real-world’ probability measure P, whereas in an arbitrage-free environment, the prices of these traded risks can be expressed in terms of an equivalent martingale measure Q. The assumption of independence between financial and actuarial risks in the real world may be quite reasonable in many situations. Making such an independence assumption in the pricing world however, may be convenient but hard to understand from an intuitive point of view. In this pedagogical paper, we investigate the conditions under which it is possible (or not) to transfer the independence assumption from P to Q. In particular, we show that an independence relation that is observed in the P-world can often not be maintained in the Q-world.

Keywords: Independence, real-world probability measure, risk-neutral probability measure, financial risks, actuarial risks, insurance securitization

Suggested Citation

Dhaene, Jan and Kukush, Alexander and Luciano, Elisa and Schoutens, Wim and Stassen, Ben, On the (In-)Dependence between Financial and Actuarial Risks (June 20, 2013). Insurance: Mathematics and Economics, Vol. 52, No. 3, 2013, Available at SSRN: https://ssrn.com/abstract=2491472

Jan Dhaene

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

Alexander Kukush

Taras Shevchenko National University of Kyiv ( email )

вул. Володимирська, 60
Kyiv, 01601
Ukraine

Elisa Luciano

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Ben Stassen (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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