Carole Bernard is in the Department of Statistics and Actuarial Science at the University of Waterloo. Steven Vanduffel is in the Department of Economics and Political Sciences at Vrije Universiteit Brussel (VUB). The authors can be contacted via e-mail: firstname.lastname@example.org and email@example.com. This article received the 2011 SCOR-EGRIE Young Economist Best Paper Award at the EGRIE 2011 meeting in Vienna. Both authors gratefully acknowledge the program “Brains Back to Brussels” that funded an extended research visit of C. Bernard at VUB in Brussels during which this article was completed. S. Vanduffel acknowledges the financial support of the BNP Paribas Fortis Chair in Banking. C. Bernard also acknowledges support from the Natural Sciences and Engineering Research Council of Canada. The authors would like to also thank two anonymous referees, and seminar participants in Ulm, Rennes, Louvain-la-Neuve, Maastricht, Brussels (ULB), Rio, and Waterloo for interesting suggestions.
Financial Bounds for Insurance Claims
Article first published online: 25 DEC 2012
© The Journal of Risk and Insurance, 2014
Journal of Risk and Insurance
Volume 81, Issue 1, pages 27–56, March 2014
How to Cite
Bernard, C. and Vanduffel, S. (2014), Financial Bounds for Insurance Claims. Journal of Risk and Insurance, 81: 27–56. doi: 10.1111/j.1539-6975.2012.01495.x
- Issue published online: 13 FEB 2014
- Article first published online: 25 DEC 2012
In this article, insurance claims are priced using an indifference pricing principle. We first revisit the traditional economic framework and then extend it to incorporate a financial (sub)market as a tool to invest and to (partially) hedge. In this context, we derive lower bounds for claims' prices, and these bounds correspond to the market prices of some explicitly known financial payoffs. In particular, we show that the discounted expected value is no longer valid as a classical lower bound for insurance prices in general: it has to be corrected by a covariance term that reflects the interaction between the insurance claim and the financial market. Examples that deal with equity-linked insurance contracts illustrate the article.