Actuarial pricing with financial methods

Alejandro Balbás, Beatriz Balbás, Raquel Balbás and Antonio Heras

Scandinavian Actuarial Journal, 2023, vol. 2023, issue 5, 450-476

Abstract: The objective of this paper is twofold. On the one hand, the optimal combination of reinsurance and financial investment will be studied under a general framework. Indeed, there is no specific type of reinsurance contract, there is no specific dynamics of the involved financial instruments and the financial market does not have to be free of frictions. On the other hand, it will be pointed out how the optimal combination above may provide us with new premium principles making the insurer global risk vanish. The risk will be managed with a coherent risk measure, and the new premium principles will seem to reflect several properties, which are desirable from both the analytical and the economic perspectives. From the analytical viewpoint, the premium principles will be continuous, homogeneous and increasing. From the economic viewpoint, the premium principles will lead to cheaper prices with respect to both the insurance market and the financial one. In other words, the premium principles will make the insurer more competitive in prices under a null risk. General necessary and sufficient optimality conditions will be given, as well as closed forms for the solutions under appropriate assumptions. Several methods preventing unbounded optimization problems will warrant special attention, and one particular case will be more thoroughly studied, namely, the combination of the Black–Scholes–Merton pricing model with the conditional value at risk.

Date: 2023
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DOI: 10.1080/03461238.2022.2111529

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