on the optimal design of participating life insurance ... · common pitfalls, the journal of risk...
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![Page 1: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/1.jpg)
UNIVERSITÀDEGLI STUDI DI TRIESTE
On the optimal designof participating life insurance contracts
Anna Rita Bacinello, Chiara Corsato and Pietro Millossovich
Department of Economics, Business, Mathematics and StatisticsUniversity of Trieste (Italy)
European Actuarial Journal ConferenceLeuven
September 10, 2018
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Outline
Motivations
● Optimal insurance, an overview
A constrained maximisation problem
● Setting of the problem
● Mathematical analysis
Study of the fairness condition
An overall picture of the solutions
● Numerical results
State-of-the-art and future work
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What do we do?
Framework
Policyholders and shareholders form a life insurance company, which issuesparticipating contracts.
Aim
● To maximise analytically the policyholders’ preferences.
● To consider fair valuation and solvency constraints.
● To study the life insurance demand.
● To investigate the problem numerically.
Warning: the results are very preliminary!
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References - Starting pointNon life insurance, origins of the optimal insurance problem
P J. Mossin, Aspects of Rational Insurance Purchaising, Journal of Political Economy76, 533-568 (1968).
P K.J. Arrow, Essays in the Theory of Risk Bearing, Markham Publishing Co., 1971.
P A. Raviv, The Design of an Optimal Insurance Policy, American Economic Review,69, 84–96 (1979).
Life insurance, literature of reference
P E. Briys, F. de Varenne, Life Insurance in a Contingent Claim Framework: Pricingand Regulatory Implications, The Geneva Papers on Risk and Insurance Theory,19, 53–72 (1994).
P E. Briys, F. de Varenne, On the Risk of Insurance Liabilities: Debunking SomeCommon Pitfalls, The Journal of Risk and Insurance, 64(4), 673–694 (1997).
P H. Schmeiser, J. Wagner, A Proposal on How the Regulator Should Set MinimumInterest Rate Guarantees in Participating Life Insurance Contracts, The Journal ofRisk and Insurance, 82(3), 659–686 (2015).
P A. Chen, P. Hieber, Optimal Asset Allocation in Life Insurance: the Impact ofRegulation, Astin Bulletin 46(3), 605–626 (2016).
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Contract featuresAt time t = 0,
Assets LiabilitiesW0 L0 = αW0
E0 = (1 − α)W0
W0 W0
α ∈ [0,1]: leverage ratio (policyholders’ percentage initial contribution)
At time t = T ,
Assets LiabilitiesWT LT = αW0G´¹¹¹¹¹¹¹¸¹¹¹¹¹¹¶
guaranteed
+ δα(WT −W0G)+´¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¸¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¶
bonus
− (αW0G −WT )+´¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¸¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¶
default
ET =WT − LTWT WT
G ∈ [0,+∞[: guaranteed amount per euro insuredδ ∈ [0,1]: participation rate
The model follows Briys, de Varenne (1994, 1997): considered default risk, nomortality risk.
![Page 6: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/6.jpg)
Contract featuresAt time t = 0,
Assets LiabilitiesW0 L0 = αW0
E0 = (1 − α)W0
W0 W0
α ∈ [0,1]: leverage ratio (policyholders’ percentage initial contribution)
At time t = T ,
Assets LiabilitiesWT LT = αW0G´¹¹¹¹¹¹¹¸¹¹¹¹¹¹¶
guaranteed
+ δα(WT −W0G)+´¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¸¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¶
bonus
− (αW0G −WT )+´¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¸¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¶
default
ET =WT − LTWT WT
G ∈ [0,+∞[: guaranteed amount per euro insuredδ ∈ [0,1]: participation rate
The model follows Briys, de Varenne (1994, 1997): considered default risk, nomortality risk.
![Page 7: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/7.jpg)
Contract featuresAt time t = 0,
Assets LiabilitiesW0 L0 = αW0
E0 = (1 − α)W0
W0 W0
α ∈ [0,1]: leverage ratio (policyholders’ percentage initial contribution)
At time t = T ,
Assets LiabilitiesWT LT = αW0G´¹¹¹¹¹¹¹¸¹¹¹¹¹¹¶
guaranteed
+ δα(WT −W0G)+´¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¸¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¶
bonus
− (αW0G −WT )+´¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¸¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¹¶
default
ET =WT − LTWT WT
G ∈ [0,+∞[: guaranteed amount per euro insuredδ ∈ [0,1]: participation rate
The model follows Briys, de Varenne (1994, 1997): considered default risk, nomortality risk.
![Page 8: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/8.jpg)
Policyholders’ final payoff profile
LT =
⎧⎪⎪⎪⎪⎨⎪⎪⎪⎪⎩
WT if WT < αW0G ,
αW0G if αW0G ≤WT <W0G ,
αW0G + δα(WT −W0G) if W0G ≤WT .
![Page 9: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/9.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 10: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/10.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 11: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/11.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 12: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/12.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 13: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/13.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 14: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/14.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 15: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/15.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 16: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/16.jpg)
AssumptionsP historical measure.
Capital market conditions
● Deterministic risk-free interest rate r .
● Rate of assets return R normally distributed, with (under P)
µ: expected assets return per year,σ: volatility of assets return per year.
R ∼P N ((µ − σ2
2)T , σ2T) .
● µ > r , or, equivalently, risk premium λ = µ−rσ
> 0.
● There exists a unique risk-neutral measure Q equivalent to P⇒ Complete and arbitrage-free market.
●
R ∼Q N ((r − σ2
2)T , σ2T) .
● Black-Scholes framework.
Policyholders’ preferences
u ∶ R→ R utility function: u twice differentiable, with u′ > 0, u′′ < 0 in R (homogeneouscohort of risk-averse policyholders).
![Page 17: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/17.jpg)
Constraints imposed
Fairness of the contract
L0 = EQ[e−rTLT ]
or equivalently
α = αGe−rT + αδe−rTEQ[(eR −G)+] − e−rTEQ[(αG − eR)+]
or elseα = αGe−rT + αδC(1,G) − P(1, αG).
Solvency requirements
Maximum ruin probability ε ∈ [0,1] fixed:
P(WT < αW0G) ≤ ε
or equivalently
αG ≤ exp((µ − σ2
2)T +N−1(ε)σ
√T).
![Page 18: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/18.jpg)
Constraints imposed
Fairness of the contract
L0 = EQ[e−rTLT ]or equivalently
α = αGe−rT + αδe−rTEQ[(eR −G)+] − e−rTEQ[(αG − eR)+]
or elseα = αGe−rT + αδC(1,G) − P(1, αG).
Solvency requirements
Maximum ruin probability ε ∈ [0,1] fixed:
P(WT < αW0G) ≤ ε
or equivalently
αG ≤ exp((µ − σ2
2)T +N−1(ε)σ
√T).
![Page 19: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/19.jpg)
Constraints imposed
Fairness of the contract
L0 = EQ[e−rTLT ]or equivalently
α = αGe−rT + αδe−rTEQ[(eR −G)+] − e−rTEQ[(αG − eR)+]
or elseα = αGe−rT + αδC(1,G) − P(1, αG).
Solvency requirements
Maximum ruin probability ε ∈ [0,1] fixed:
P(WT < αW0G) ≤ ε
or equivalently
αG ≤ exp((µ − σ2
2)T +N−1(ε)σ
√T).
![Page 20: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/20.jpg)
Constraints imposed
Fairness of the contract
L0 = EQ[e−rTLT ]or equivalently
α = αGe−rT + αδe−rTEQ[(eR −G)+] − e−rTEQ[(αG − eR)+]
or elseα = αGe−rT + αδC(1,G) − P(1, αG).
Solvency requirements
Maximum ruin probability ε ∈ [0,1] fixed:
P(WT < αW0G) ≤ εor equivalently
αG ≤ exp((µ − σ2
2)T +N−1(ε)σ
√T).
![Page 21: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/21.jpg)
The problem setup
Constrained maximisation problem
Problemmax
(α,G)∈[0,1]×[0,+∞[
EP[u(e−rTLT − L0)]
Constraints
● Fairness conditionL0 = EQ[e−rTLT ]
● Ruin probability condition
P(WT < αW0G) ≤ ε
Remark: the problem is well-posed.
![Page 22: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/22.jpg)
The problem setup
Constrained maximisation problem
Problemmax
(α,G)∈[0,1]×[0,+∞[
EP[u(e−rTLT − L0)]
Constraints
● Fairness conditionL0 = EQ[e−rTLT ]
● Ruin probability condition
P(WT < αW0G) ≤ ε
Remark: the problem is well-posed.
![Page 23: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/23.jpg)
A possible interpretation of e−rTLT − L0
The objective function is given by
EP[u(e−rTLT − L0)].
Main characters: policyholders.
Initial investment (t = 0) Final payoff (t = T )Insurance company L0 = αW0 LT
Risk-free (r) (1 − α)W0 (1 − α)W0erT
W0 LT + (1 − α)W0erT
Policyholders’ final profit discounted at t = 0:
e−rT(LT + (1 − α)W0erT) −W0 = e−rTLT + (W0 −W0) − αW0
= e−rTLT − L0.
![Page 24: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/24.jpg)
A possible interpretation of e−rTLT − L0
The objective function is given by
EP[u(e−rTLT − L0)].
Main characters: policyholders.
Initial investment (t = 0) Final payoff (t = T )Insurance company L0 = αW0 LT
Risk-free (r) (1 − α)W0 (1 − α)W0erT
W0 LT + (1 − α)W0erT
Policyholders’ final profit discounted at t = 0:
e−rT(LT + (1 − α)W0erT) −W0 = e−rTLT + (W0 −W0) − αW0
= e−rTLT − L0.
![Page 25: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/25.jpg)
A possible interpretation of e−rTLT − L0
The objective function is given by
EP[u(e−rTLT − L0)].
Main characters: policyholders.
Initial investment (t = 0) Final payoff (t = T )Insurance company L0 = αW0 LT
Risk-free (r) (1 − α)W0 (1 − α)W0erT
W0 LT + (1 − α)W0erT
Policyholders’ final profit discounted at t = 0:
e−rT(LT + (1 − α)W0erT) −W0 = e−rTLT + (W0 −W0) − αW0
= e−rTLT − L0.
![Page 26: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/26.jpg)
Pareto-optimality
The maximisation problem studied is related to a Pareto-optimalityproblem, characterised by the following criteria:
Policyholders’
Insurer’s
U(α,G) = EP[u(e−rTLT − L0)]Π(α,G) = P(WT < αW0G)
Theorem
For any given maximal ruin probability ε, the solutions (α,G) of thecorresponding maximisation problem are also pareto-optima.
![Page 27: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/27.jpg)
Pareto-optimality
The maximisation problem studied is related to a Pareto-optimalityproblem, characterised by the following criteria:
Policyholders’
Insurer’s
U(α,G) = EP[u(e−rTLT − L0)]Π(α,G) = P(WT < αW0G)
Theorem
For any given maximal ruin probability ε, the solutions (α,G) of thecorresponding maximisation problem are also pareto-optima.
![Page 28: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/28.jpg)
Study of the fairness condition
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Study of the fairness condition
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Set of admissible solutions
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Set of admissible solutions
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The extremal case δ = 1
Theorem (δ = 1)
The solutions of the constrained maximisation problem are given by
● (α̂,0), for a unique α̂ ∈ ]0,1[, if EP[u′(W0(eR−rT − 1))(eR−rT − 1)] ≥ 0.
● (1,G), for all G ≤ exp((µ − σ2
2)T +N−1(ε)σ√T), otherwise.
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The extremal case δ = 1
Theorem (δ = 1)
The solutions of the constrained maximisation problem are given by
● (α̂,0), for a unique α̂ ∈ ]0,1[, if EP[u′(W0(eR−rT − 1))(eR−rT − 1)] ≥ 0.
● (1,G), for all G ≤ exp((µ − σ2
2)T +N−1(ε)σ√T), otherwise.
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The case δ ∈ [0,1[ - Preliminary results
Theorem (δ ∈ [0,1[)The only solution of the constrained maximisation problem is given by(α̃,Gδ(α̃)), for some α̃ ∈ ]0,1[.
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Numerical results - 1
0.0 0.2 0.4 0.6 0.8 1.0
−15
−10
−5
05
δ=0.80
α
cert
aint
y eq
uiva
lent
●
0.0 0.2 0.4 0.6 0.8 1.0
−15
−10
−5
05
δ=0.95
α
cert
aint
y eq
uiva
lent
●
Certainty equivalent related to the policyholders’ expected utility, with δ = 0.80 (left),δ = 0.95 (right): T = 20, W0 = 100, r = 0.03, λ = 0.1, σ = 0.20 (µ = 0.05), ε = 0.05,
u(x) = (x+W0)1−ρ1−ρ , ρ = 1.5.
The ruin probability condition at the optimal solution may be binding or not!
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Numerical results - 1
0.0 0.2 0.4 0.6 0.8 1.0
−15
−10
−5
05
δ=0.80
α
cert
aint
y eq
uiva
lent
●
0.0 0.2 0.4 0.6 0.8 1.0
−15
−10
−5
05
δ=0.95
α
cert
aint
y eq
uiva
lent
●
Certainty equivalent related to the policyholders’ expected utility, with δ = 0.80 (left),δ = 0.95 (right): T = 20, W0 = 100, r = 0.03, λ = 0.1, σ = 0.20 (µ = 0.05), ε = 0.05,
u(x) = (x+W0)1−ρ1−ρ , ρ = 1.5.
The ruin probability condition at the optimal solution may be binding or not!
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Comparative statics (δ = 0.80)
●
●
●
●
●
●
●
●
●●
0.0 0.1 0.2 0.3 0.4 0.5 0.6
0.0
0.2
0.4
0.6
0.8
risk premium comparative statics
λ
optim
al α
●
●
0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.400.
00.
20.
40.
60.
8
volatility comparative statics
σ
optim
al α
Dependence of the optimal leverage ratio αon the risk premium λ, with σ = 0.20.
Dependence of the optimal leverage ratio αon the volatility σ, with λ = 0.1.
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Comparative statics - 2
2 3 4 5 6 7 8
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
(relative) risk aversion comparative statics
ρ
optim
al α
Dependence of the optimal leverage ratio α on the relative risk aversion ρ, with λ = 0.1,
σ = 0.20, δ = 0.80.
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To sum up
● We consider a model for the creation of a life insurance company issuingparticipating contracts.
● We maximise the policyholders’ preferences.
● We impose fair valuation and solvency constraints.
● Analytical results: if λ > 0 and G is upper unbounded, then the optimal solutioninduces the policyholders to insure (α > 0).
The properties of the optimal contracts depend on the choice of δ (δ = 1, δ < 1)and, if δ = 1, on a condition involving the policyholders’ risk aversion.
● Numerical results: according to the parameters of the contract chosen, the ruinprobability condition evaluated at the optimal solution may be binding or not.
This contradicts the assumption made in Schmeiser, Wagner (2015).
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To sum up
● We consider a model for the creation of a life insurance company issuingparticipating contracts.
● We maximise the policyholders’ preferences.
● We impose fair valuation and solvency constraints.
● Analytical results: if λ > 0 and G is upper unbounded, then the optimal solutioninduces the policyholders to insure (α > 0).
The properties of the optimal contracts depend on the choice of δ (δ = 1, δ < 1)and, if δ = 1, on a condition involving the policyholders’ risk aversion.
● Numerical results: according to the parameters of the contract chosen, the ruinprobability condition evaluated at the optimal solution may be binding or not.
This contradicts the assumption made in Schmeiser, Wagner (2015).
![Page 41: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/41.jpg)
To sum up
● We consider a model for the creation of a life insurance company issuingparticipating contracts.
● We maximise the policyholders’ preferences.
● We impose fair valuation and solvency constraints.
● Analytical results: if λ > 0 and G is upper unbounded, then the optimal solutioninduces the policyholders to insure (α > 0).
The properties of the optimal contracts depend on the choice of δ (δ = 1, δ < 1)and, if δ = 1, on a condition involving the policyholders’ risk aversion.
● Numerical results: according to the parameters of the contract chosen, the ruinprobability condition evaluated at the optimal solution may be binding or not.
This contradicts the assumption made in Schmeiser, Wagner (2015).
![Page 42: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/42.jpg)
To sum up
● We consider a model for the creation of a life insurance company issuingparticipating contracts.
● We maximise the policyholders’ preferences.
● We impose fair valuation and solvency constraints.
● Analytical results: if λ > 0 and G is upper unbounded, then the optimal solutioninduces the policyholders to insure (α > 0).
The properties of the optimal contracts depend on the choice of δ (δ = 1, δ < 1)and, if δ = 1, on a condition involving the policyholders’ risk aversion.
● Numerical results: according to the parameters of the contract chosen, the ruinprobability condition evaluated at the optimal solution may be binding or not.
This contradicts the assumption made in Schmeiser, Wagner (2015).
![Page 43: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/43.jpg)
To sum up
● We consider a model for the creation of a life insurance company issuingparticipating contracts.
● We maximise the policyholders’ preferences.
● We impose fair valuation and solvency constraints.
● Analytical results: if λ > 0 and G is upper unbounded, then the optimal solutioninduces the policyholders to insure (α > 0).
The properties of the optimal contracts depend on the choice of δ (δ = 1, δ < 1)and, if δ = 1, on a condition involving the policyholders’ risk aversion.
● Numerical results: according to the parameters of the contract chosen, the ruinprobability condition evaluated at the optimal solution may be binding or not.
This contradicts the assumption made in Schmeiser, Wagner (2015).
![Page 44: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/44.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
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State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 46: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/46.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 47: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/47.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 48: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/48.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 49: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/49.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 50: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/50.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 51: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/51.jpg)
State-of-the-art and possible developments
● The maximisation problem has been completely solved analyticallywhen δ = 1.
What can be said more on the case δ < 1 (and λ > 0)?
● The model has been constructed considering the investment risk, only.
What if the mortality risk is also taken into account?
● The risk-free rate r is assumed to be deterministic.
What if it is stochastic (Briys, de Varenne, 1994)?
● The rate of assets return R is modelled by a normal distribution.
What if R has a different type of distribution?
![Page 52: On the optimal design of participating life insurance ... · Common Pitfalls, The Journal of Risk and Insurance, 64(4), 673{694 (1997). P H. Schmeiser, J. Wagner, A Proposal on How](https://reader033.vdocuments.mx/reader033/viewer/2022043012/5faa9e91fe588e7c57531ef2/html5/thumbnails/52.jpg)
Thank you for your attention!