Insurance–finance arbitrage

Abstract Most insurance contracts are inherently linked to financial markets, be it via interest rates, or—as hybrid products like equity‐linked life and variable annuities—directly stocks or indices. However, not for trade except sometimes as surrender the selling office. This excludes situation of arbitrage by buying at different prices. Furthermore, insurer uses private information on top publicly available one about markets. paper provides a study consistency in connection with trades market explicit mention involved. By defining strategies an portfolio combining them trading strategies, we arrive notion insurance–finance (IFA). In analogy classical fundamental theorem asset pricing, give absence IFA, leading existence insurance–finance‐consistent probability. addition, when this probability gives expected discounted cash‐flows required EIOPA best estimate. The generality our approach allows incorporate many important aspects, mortality risk general levels dependence between stock Utilizing theory enlargements filtrations, construct tractable framework consistent valuation.