University of Illinois Urbana-Champaign

Pricing and dynamic hedging strategies for a bond-linked life insurance policy with a guarantee

Lee, Keun Chang

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https://hdl.handle.net/2142/19286

Description

Title
Pricing and dynamic hedging strategies for a bond-linked life insurance policy with a guarantee
Author(s)
Lee, Keun Chang
Issue Date
1991
Doctoral Committee Chair(s)
D'Arcy, Stephen P.
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
  • Variable life insurance (VL) has gained great popularity for its fluctuating but minimum guaranteed death benefit under the high level of inflation in the late 1970's. It also offers policyowner a choice of vehicles in which the cash value can be invested. The risk from the death value guarantee is systematic and thus may jeopardize the financial soundness of the insurer unless proper pricing and investment strategies are adopted.
  • Utilizing the recently developed pricing models of interest rate contingent claims, this thesis determines the equilibrium charge for the death benefit guarantee of VL when the policyowner chooses to invest the cash value in a bond market. Dynamic hedging strategies under a stochastic interest rate environment are also developed, which can eliminate or reduce the investment risk stemming from the minimum death value guarantee. Application of the proposed strategies would have the effect of reducing the volatility of earnings for VL insurers and lowering the probability and size of catastrophic losses.
Type of Resource
text
Permalink
http://hdl.handle.net/2142/19286
Copyright and License Information
Copyright 1991 Lee, Keun-Chang

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