Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences

Wing Fung Chong

Insurance: Mathematics and Economics, 2019, vol. 88, issue C, 93-107

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 (search for similar items in EconPapers)
JEL-codes: C61 G22 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:88:y:2019:i:c:p:93-107

DOI: 10.1016/j.insmatheco.2019.06.003

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