Hedging life insurance with pure endowments |
| |
Authors: | Erhan Bayraktar Virginia R Young |
| |
Institution: | aDepartment of Mathematics, University of Michigan, Ann Arbor, MI 48109, USA |
| |
Abstract: | We extend the work of Milevsky et al., Milevsky, M.A., Promislow, S.D., Young, V.R., 2005. Financial valuation of mortality risk via the instantaneous Sharpe ratio (preprint)] and Young, Young, V.R., 2006. Pricing life insurance under stochastic mortality via the instantaneous Sharpe ratio (preprint)] by pricing life insurance and pure endowments together. We assume that the company issuing the life insurance and pure endowment contracts requires compensation for their mortality risk in the form of a pre-specified instantaneous Sharpe ratio. We show that the price Pm,n for m life insurances and n pure endowments is less than the sum of the price Pm,0 for m life insurances and the price P0,n for n pure endowments. Thereby, pure endowment contracts serve as a hedge against the (stochastic) mortality risk inherent in life insurance, and vice versa. |
| |
Keywords: | Stochastic mortality Sharpe ratio Life insurance Pure endowments Non-linear partial differential equations |
本文献已被 ScienceDirect 等数据库收录! |
|