A Levy process-based framework for the fair valuation of participating life insurance contracts

Ballotta, L. (2005). A Levy process-based framework for the fair valuation of participating life insurance contracts. Insurance: Mathematics and Economics, 37(2), pp. 173-196. doi: 10.1016/j.insmatheco.2004.10.001

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Abstract

In this communication, we develop suitable valuation techniques for a with-profit/unitized with profit life insurance policy providing interest rate guarantees, when a jump-diffusion process for the evolution of the underlying reference portfolio is used. Particular attention is given to the mispricing generated by the misspecification of a jump-diffusion process for the underlying asset as a pure diffusion process, and to which extent this mispricing affects the profitability and the solvency of the life insurance company issuing these contracts.

Item Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Insurance: Mathematics and Economics. Changes resulting from the publishing process, such as editing, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in INSURANCE: MATHEMATICS AND ECONIMICS, VOL 37, ISSUE 2, October 2005, DOI 10.1016/j.insmatheco.2004.10.001
Uncontrolled Keywords: Esscher transform; Fair value; Incomplete markets; Lévy processes; Participating contracts
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/5812

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