Tax- and expense-modified risk-minimization for insurance payment processes

Kristian Buchardt, Christian Furrer and Thomas Møller

Scandinavian Actuarial Journal, 2020, vol. 2020, issue 10, 934-961

Abstract: We study the problem of determining risk-minimizing investment strategies for insurance payment processes in the presence of taxes and expenses. We consider the situation where taxes and expenses are paid continuously and symmetrically and introduce the concept of tax- and expense-modified risk-minimization. Risk-minimizing strategies in the presence of taxes and expenses are derived and linked to Galtchouk-Kunita-Watanabe decompositions associated with modified versions of the original payment processes. Furthermore, we show equivalence to an alternative approach involving an artificial market consisting of after-tax and after-expense assets, and we establish – in a certain sense – consistency with classic risk-minimization. Finally, a case study involving classic multi-state life insurance payments in combination with a bond market exemplifies the results.

Date: 2020
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DOI: 10.1080/03461238.2020.1790413

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