Hybrid life insurance valuation based on a new standard deviation premium principle in a stochastic interest rate framework

Oussama Belhouari (), Griselda Deelstra and Pierre Devolder
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Oussama Belhouari: Université catholique de Louvain, LIDAM/ISBA, Belgium
Pierre Devolder: Université catholique de Louvain, LIDAM/ISBA, Belgium

No 2024024, LIDAM Reprints ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: In a complete arbitrage-free financial market, financial products are valued with the risk-neutral measure and these products are completely hedgeable. In life insurance, the approach is different as the valuation is based on an insurance premium principle which includes a safety loading. The insurer reduces the risk by pooling a vast number of independent risks. In our framework, we suggest valuations of a class of products that are dependent on both mortality and financial risk, namely hybrid life products. The main contribution of this paper is to present a generalized standard deviation premium principle in a stochastic interest rate framework, and to integrate it in different valuation operators suggested in the literature. We illustrate our methods with a classical application, namely a Pure Endowment with profit. Several numerical results are presented, and an extensive sensitivity analysis is included.

Keywords: Financial risk; Actuarial risk; Hybrid life products; Fair valuation; Risk decomposition (search for similar items in EconPapers)
Pages: 28
Date: 2024-09-13
Note: In: European Actuarial Journal, 2024
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Persistent link: https://EconPapers.repec.org/RePEc:aiz:louvar:2024024

DOI: 10.1007/s13385-024-00396-2

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