Solving Life Cycle Problems With Biometric Risk by Artificial Insurance Markets

27 Pages Posted: 14 Dec 2018

See all articles by Christoph Hambel

Christoph Hambel

Goethe University Frankfurt

Holger Kraft

Goethe University Frankfurt

Claus Munk

Copenhagen Business School

Date Written: November 22, 2018

Abstract

We establish a powerful method to solve the life-cycle consumption choice problem of an individual facing biometric risks that are uninsurable. Problems of this type are notoriously hard to solve and closed-form solutions are unknown. The solution is obtained by optimizing over a parametrized family of consumption strategies. Each of these strategies is the optimal consumption strategy derived in closed form in an artificial market where the individual has access to fully flexible insurance contracts. In settings with mortality risk, critical illness risk and habit formation, our solution method outperforms the well-established finite difference approach both in running time and in precision. In contrast to the existing literature, our method also produces a closed-form consumption strategy, with some parameters determined in a numerical optimization.

Keywords: Life-Cycle Consumption, Biometric Risks, Insurance, Artificial Markets, Habit Formation

JEL Classification: G10, D14, D91, E21, R21

Suggested Citation

Hambel, Christoph and Kraft, Holger and Munk, Claus, Solving Life Cycle Problems With Biometric Risk by Artificial Insurance Markets (November 22, 2018). Available at SSRN: https://ssrn.com/abstract=3289246 or http://dx.doi.org/10.2139/ssrn.3289246

Christoph Hambel

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Claus Munk

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

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