Hedging of unit-linked life insurance contracts with unobservable mortality hazard rate via local risk-minimization

Claudia Ceci, Katia Colaneri and Alessandra Cretarola

Insurance: Mathematics and Economics, 2015, vol. 60, issue C, 47-60

Abstract: In this paper we investigate the local risk-minimization approach for a combined financial-insurance model where there are restrictions on the information available to the insurance company. In particular we assume that, at any time, the insurance company may observe the number of deaths from a specific portfolio of insured individuals but not the mortality hazard rate. We consider a financial market driven by a general semimartingale and we aim to hedge unit-linked life insurance contracts via the local risk-minimization approach under partial information. The Föllmer–Schweizer decomposition of the insurance claim and explicit formulas for the optimal strategy for pure endowment and term insurance contracts are provided in terms of the projection of the survival process on the information flow. Moreover, in a Markovian framework, this leads to a filtering problem with point process observations.

Keywords: Local risk-minimization; Partial information; Unit-linked life insurance contracts; Minimal martingale measure; Föllmer-Schweizer decomposition; Markovian models; Filtering (search for similar items in EconPapers)
JEL-codes: C02 G11 G22 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Hedging of unit-linked life insurance contracts with unobservable mortality hazard rate via local risk-minimization (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:60:y:2015:i:c:p:47-60

DOI: 10.1016/j.insmatheco.2014.10.013

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