Reference no: EM134823 , Length: 75

Dissertation writing help - Pricing and Hedging Life Insurance Guarantees in Incomplete Market Setting

Custom Dissertation Writing Service on evolution in the annuity markets

Recent evolution in the annuity markets suggests an evolution towards simplified products design and less complex embedded derivatives. In a competitive market largely driven by sales, the techniques used for pricing and risk management proved inefficient to adequately capture the dynamics of the various risk factors. In particular the assumption of market completeness for products with a large actuarial risk component and with embedded options on non-traded assets is problematic. Uncertainty around actuarial decrements such as mortality, lapse and partial withdrawal and basis risk resulting from the impossibility to hedge with the underlying asset make the classical option valuation theory inadequate for such products. This dissertation proposes an innovative methodology to price, structure and hedge the different market risks in equity-linked life insurance contracts consistently with realistic assumptions. The original contribution of this study lies in the introduction of the concept of implied utility which allows an intuitive treatment of the game option. Implied utility is also applied to the design and consistent pricing of tailor-made policies. Optimal asset allocation is calculated subject to the desired consumption rate, returns expectations and risk appetite of the insured person.