Benchmarked Risk Minimizing Hedging Strategies for Life Insurance Policies

21 Pages Posted: 24 Apr 2019

See all articles by Jin Sun

Jin Sun

University of Technology Sydney (UTS)

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Date Written: March 5, 2019

Abstract

Traditional life insurance policies offer no equity investment opportunities for the premium paid, and suffer from low returns over the long insurance terms. Modern equity-linked insurance policies offer equity investment opportunities exposed to equity market risk. To combine the low-risk of traditional policies with the high returns offered by equity-linked policies, we consider insurance policies under the benchmark approach (BA), where the policyholders' funds are invested in the growth-optimal portfolio and the locally risk-free savings account. Under the BA, life insurance policies can be delivered at their minimal costs, lower than the classical actuarial theory predicts. Due to unhedgeable mortality risk, life insurance policies cannot be fully hedged. In this case benchmarked risk-minimization can be applied to obtain hedging strategies with minimally fluctuating pro fit and loss processes, where the fluctuations can further be reduced through diversification.

Keywords: benchmark approach, benchmarked risk minimization, life insurance, mortality model

JEL Classification: G13, G22

Suggested Citation

Sun, Jin and Platen, Eckhard, Benchmarked Risk Minimizing Hedging Strategies for Life Insurance Policies (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3347449 or http://dx.doi.org/10.2139/ssrn.3347449

Jin Sun (Contact Author)

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

Broadway
GPO Box 123
Sydney, NSW 2007, 2007
Australia
+61 2 9514 7759 (Phone)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

P.O. Box 123
Broadway
Sydney, New South Wales 2007
Australia
+61 (02) 9514 2271 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
65
Abstract Views
604
Rank
635,458
PlumX Metrics