INSURANCE-FINANCE ARBITRAGE

Philippe Artzner, Karl-Theodor Eisele () and Thorsten Schmidt ()
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Karl-Theodor Eisele: LaRGE Research Center, Université de Strasbourg
Thorsten Schmidt: Albert-Ludwigs University of Freiburg

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: Most insurance contracts are inherently linked to financial markets, be it via interest rates, or – as hybrid products like equity-linked life insurance and variable annuities – directly to stocks or indices. However, insurance contracts are not for trade except sometimes as surrender to the selling office. This excludes the situation of arbitrage by buying and selling insurance contracts at different prices. Furthermore, the insurer uses private information on top of the publicly available one about financial market. This paper provides a study of the consistency of insurance contracts in connection with trades in the financial market with explicit mention of the information involved. By defining strategies on an insurance portfolio and combining them with financial trading strategies, we arrive at the notion of insurance-finance arbitrage (IFA). In analogy to the classical fundamental theorem of asset pricing, we give a fundamental theorem on the absence of IFA, leading to the existence of an insurance-finance-consistent probability. In addition, we study when this probability gives the expected discounted cash-flows required by the EIOPA best estimate. The generality of our approach allows to incorporate many important aspects, like mortality risk or general levels of dependence between mortality and stock markets. Utilizing the theory of enlargements of filtrations, we construct a tractable framework for insurance-finance consistent valuation.

Keywords: fundamental theorem about absence of insurance-finance arbitrage; enlargement of filtration; insurance-finance consistency; conditional law of large numbers; best estimate of liabilities; the QP-rule; non traded assets; hybrid products. (search for similar items in EconPapers)
Date: 2022
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http://ifs.u-strasbg.fr/large/publications/2022/2022-09.pdf (application/pdf)

Related works:
Journal Article: Insurance–finance arbitrage (2024)
Working Paper: Insurance-Finance Arbitrage (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:lar:wpaper:2022-09

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