Pricing and Hedging Equity-Linked Life Insurance Contracts Beyond the Classical Paradigm: The Principle of Equivalent Forward Preferences

39 Pages Posted: 2 Oct 2018 Last revised: 20 May 2019

See all articles by Wing Fung Chong

Wing Fung Chong

Heriot-Watt University - Department of Actuarial Mathematics and Statistics

Date Written: May 19, 2019

Abstract

By applying the principle of equivalent forward preferences, this paper revisits the pricing and hedging problems for equity-linked life insurance contracts. The equity-linked contingent claim depends on, not only the future lifetime of the policyholder, but also the performance of the reference portfolio in the financial market for the segregated account of the policyholder. For both zero volatility and non-zero volatility forward utility preferences, prices and hedging strategies of the contract are represented by solutions of random horizon backward stochastic differential equations. Numerical illustration is provided for the zero volatility case. The derived prices and hedging strategies are also compared with classical results in the literature.

Keywords: Equity-Linked Life Insurance; Pricing and Hedging; Indifference Approach; Forward Utility Preferences; Random Horizon BSDEs

JEL Classification: G22; C61

Suggested Citation

Chong, Wing Fung, Pricing and Hedging Equity-Linked Life Insurance Contracts Beyond the Classical Paradigm: The Principle of Equivalent Forward Preferences (May 19, 2019). Available at SSRN: https://ssrn.com/abstract=3250266 or http://dx.doi.org/10.2139/ssrn.3250266

Wing Fung Chong (Contact Author)

Heriot-Watt University - Department of Actuarial Mathematics and Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

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