On Valuation and Risk Management at the Interface of Insurance and Finance

This paper reviews methods for hedging and valuation of insurance claims with an inherent financial risk, with special emphasis on quadratic hedging approaches and indifference pricing principles and their applications in insurance. It thus addresses aspects of the interplay between finance and insurance, an area which has gained considerable attention during the past years, in practice as well as in theory. Products combining insurance risk and financial risk have gained considerable market shares. Special attention is paid to unit-linked life insurance contracts, and it is demonstrated how these contracts can be valuated and hedged by using traditional methods as well as more recent methods from incomplete financial markets such as risk-minimization, meanvariance hedging, super-replication and indifference pricing with mean-variance utility functions.