Embedded Options and Integrated Asset-Liability Management for Life Insurance
Author: Gabriele Susinno
Publisher:
Published: 2004
Total Pages: 18
ISBN-13:
DOWNLOAD EBOOKIn this paper we describe life insurance contracts as a portfolio of financial options. This type of policy constitutes the bulk of mathematical reserves of continental European insurance companies. A close examination of a typical contract reveals an exchange of options between policy holders and the Insurance company whereby the former is long a floor option (the minimum guaranteed return) on the fund and short a call on the fund excess return relative to the floor. From an insurance company's point of view, this amounts to holding a portfolio of financial options vis-a-vis the client (the most common types of options included in Insurance contracts are the standard European and cliquet with European exercise options). This framework can be successfully used to support strategic decisions at a firm-wide level: return on risk capital, product design and innovation, risk management, asset benchmark selection and hedging strategies.