Symmetry (Jan 2024)

Actuarial Valuation and Hedging of Life Insurance Liabilities in the Presence of Stochastic Mortality Risk under the Locally Risk-Minimizing Hedging Approach

  • Mohamed El Farissi,
  • Mhamed Eddahbi,
  • Ali Goumar

DOI
https://doi.org/10.3390/sym16020165
Journal volume & issue
Vol. 16, no. 2
p. 165

Abstract

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The paper examines the valuation and hedging of life insurance obligations in the presence of mortality risk using the local risk-minimizing hedging approach. Roughly speaking, it is assumed that the lifetime of policyholders in an insurance portfolio is modeled by a point process whose stochastic intensity is controlled by a diffusion process. The stock price process is assumed to be a regime-switching Lévy process with non-zero regime-switching drift, where the parameters are assumed to depend on the economic states. Using the Föllmer–Schweizer decomposition, the main valuation and hedging results for a conditional payment process are determined. Some specific situations have been considered in which the local risk-minimizing strategies for a stream of liability payments or a unit-linked contract are presented.

Keywords