Tid: 11 februari 2008 kl 16.15-17.00

Plats : Seminarierummet 3733, Institutionen för matematik, KTH, Lindstedts väg 25, plan 7. Karta!

Föredragshållare: Victor Corzo Arellano

Titel: Life Insurance Contract Pricing Approach Considering Likelihood for Correlated Market Bankruptcy

Sammanfattning: This work was initiated to study the economic context of a life-insurance company in Sweden. By dividing the priorities of the company along money-streams, such as income and expenditure, and activity such as risk transfer and investment, this study intends to identify potential weaknesses in investment and risk transfer regimes. For simplicity we make a strong assumption, stating that the risk transfer is optimized by the company itself, which allows us to focus on prevalent investment strategies. Since all life insurance providers are subject to the same restrictions and the tools they use are similar, this will arguably be reflected in their respective portfolios. Consequently, as the overall assessments of risk are vital for portfolio construction, common hedging techniques, such as spreading assets over different classes and sectors, appear to be wide-spread. However, as these techniques appear to be employed within specific economic sectors, the holders are vulnerable to two effects: First, as strategies tend to mimic one another, use similar underlying data, they create additional risk by association. Second, as these strategies are commonly employed within a specific economic region, they are highly vulnerable to systemic shocks. In addition we show that in the presence of a negative systemic shock, assets tend to depreciate in larger amounts than in normal times. We therefore argue that, despite rather sound risk hedging strategy used by life-insurance companies in Sweden, there are potentially adverse results restricting investments to specific economic regions, which may result in powerful negative shocks to asset value and spiking risk assessments.

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