TY - JOUR
T1 - Indifference pricing of insurance-linked securities in a multi-period model
AU - Liu, Haibo
AU - Tang, Qihe
AU - Yuan, Zhongyi
N1 - Funding Information:
The authors would like to thank the two referees for their useful comments on an earlier version of this paper and thank An Chen at Ulm University, Hans-Ulrich Gerber at University of Lausanne, Bin Li at the University of Waterloo, and Yang Shen at UNSW Sydney for their helpful discussions throughout this project. The research was supported by the Australian Government through the Australian Research Council’s Discovery Projects funding scheme (project DP200101859). Haibo Liu acknowledges the financial support from both The University of Iowa and The Society of Actuaries (SOA) James C. Hickman Scholar program during his Ph.D. studies in 2015–2019.
Funding Information:
The authors would like to thank the two referees for their useful comments on an earlier version of this paper and thank An Chen at Ulm University, Hans-Ulrich Gerber at University of Lausanne, Bin Li at the University of Waterloo, and Yang Shen at UNSW Sydney for their helpful discussions throughout this project. The research was supported by the Australian Government through the Australian Research Council's Discovery Projects funding scheme (project DP200101859). Haibo Liu acknowledges the financial support from both The University of Iowa and The Society of Actuaries (SOA) James C. Hickman Scholar program during his Ph.D. studies in 2015?2019.
Publisher Copyright:
© 2020 Elsevier B.V.
PY - 2021/3/1
Y1 - 2021/3/1
N2 - Insurance-linked securities (ILS) have recently become an important risk transfer mechanism to help insurers and reinsurers transfer catastrophe risks to the capital market. We employ the utility indifference approach to establish a pricing framework for a representative agent who trades an ILS with payoff linked to an insurance risk process and a reference rate process. The agent, while investing in a financial market composed of traditional financial instruments, discovers her indifference prices of the ILS by weighing the ILS trade on her exponential utility. The problem has been studied extensively, but mainly in one-period models that are best suited for zero-coupon instruments. In view of the prevalence of ILS with interim payments, we extend the study to a multi-period model by working with time 0 equivalent values and solving a multi-period optimization problem. We offer insights into issues such as coherence and time consistency of the ask and bid indifference prices obtained. Finally, we conduct a sensitivity analysis of the prices against certain risk parameters.
AB - Insurance-linked securities (ILS) have recently become an important risk transfer mechanism to help insurers and reinsurers transfer catastrophe risks to the capital market. We employ the utility indifference approach to establish a pricing framework for a representative agent who trades an ILS with payoff linked to an insurance risk process and a reference rate process. The agent, while investing in a financial market composed of traditional financial instruments, discovers her indifference prices of the ILS by weighing the ILS trade on her exponential utility. The problem has been studied extensively, but mainly in one-period models that are best suited for zero-coupon instruments. In view of the prevalence of ILS with interim payments, we extend the study to a multi-period model by working with time 0 equivalent values and solving a multi-period optimization problem. We offer insights into issues such as coherence and time consistency of the ask and bid indifference prices obtained. Finally, we conduct a sensitivity analysis of the prices against certain risk parameters.
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U2 - 10.1016/j.ejor.2020.07.028
DO - 10.1016/j.ejor.2020.07.028
M3 - Article
AN - SCOPUS:85089201174
SN - 0377-2217
VL - 289
SP - 793
EP - 805
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 2
ER -