This dissertation tackles the current life insurance industry challenge to price and hedge
minimum rate of return guarantees (MRRG) embedded in recurring-contribution life
insurance contracts in a practical manner. The key contribution to the literature is to outline a
practical approach to quantify and project the impact of dynamic hedging strategies for such
options. MRRGs are typically very long-dated and as a result the validity of using typical
financial economics options pricing models under incomplete market conditions remains a
debate. However, life insurers need robust, practical solutions to assist them to manage
market risk exposures for day-to-day solvency and income statement management. Literature
specific to the topic of MRRG pricing and hedging over recurring-contribution life insurance
products is sparse but Schrager and Pelssers’ significant contribution (Schrager and Pelsser
2004) provided a basis on which this dissertation was built. Schrager and Pelsser show these
options to be analogous to Asian options written over a stochastically-weighted average of
the underlying unit fund price. This dissertation demonstrates the effects of stochastic interest
rates on MRRGs increase with maturity, as shown by Schrager and Pelsser. Consequentially,
users should be aware of the effect and limitations of their choice of interest rate model when
pricing MRRGs. Sensitivities for the various maturity terms of MRRG benefits are shown
and provide readers with insight into the factors driving the dynamics of such options. A
simple dynamic hedging program is outlined and projected under real-world evolutions on a
daily basis, thus allowing the effectiveness of the hedging program to be tested. / Dissertation (MSc)--University of Pretoria, 2014. / lk2014 / Mathematics and Applied Mathematics / MSc / Unrestricted
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:up/oai:repository.up.ac.za:2263/43230 |
| Date | January 2014 |
| Creators | Rice, Robert Bruce |
| Contributors | Mare, Eben |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Dissertation |
| Rights | © 2014 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria. |
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