Abstract
A market is presented in which insurance related risk is traded through both insurance and financial contracts. The coexistence of these contracts leads to a new price selection criterion. Financial prices need to be actuarially consistent with insurance premiums in addition to the exclusion of arbitrage opportunities in the market. Even though this additional restriction on price dynamics does not imply unique price determination, a representation of actuarially consistent prices is deduced. In this representation, the common underlying stochastic structure is separated from the contract’s specification by applying Fourier analysis and a link is established between financial prices and insurance premiums. This connection is examined in more detail for commonly used premium calculation principles.
Series
Working Paper
Year
2002
Institution
The Wharton School (Unversity of Pennsylvania)
Keywords
insurance derivatives; actuarially consistent pricing; Fourier analysis; incomplete markets; premium calculation principles
Categories
New Valuation Techniques
