Hedging insurance books

Peter Carr, Dilip B. Madan, Michael Melamed, Wim Schoutens

Research output: Contribution to journalArticlepeer-review


Complex insurance risks typically have multiple exposures. If available, options on multiple underliers with a short maturity can be employed to hedge this exposure. More precisely, the present value of aggregate payouts is hedged using least squares, ask price minimization, and ask price minimization constrained to long only option positions. The proposed hedges are illustrated for hypothetical Variable Annuity contracts invested in the nine sector ETF's of the US economy. We simulate the insurance accounts by simulating risk-neutrally the underliers by writing them as transformed correlated normals; the physical and risk-neutral evolution is taken in the variance gamma class as a simple example of a non-Gaussian limit law. The hedges arising from ask price minimization constrained to long only option positions delivers a least cost and most stable result.

Original languageEnglish (US)
Pages (from-to)364-372
Number of pages9
JournalInsurance: Mathematics and Economics
StatePublished - Sep 1 2016


  • Acceptable risks
  • Arrival rates
  • Bid and ask prices
  • Concave distortions
  • Risk premiums
  • Variance gamma model

ASJC Scopus subject areas

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


Dive into the research topics of 'Hedging insurance books'. Together they form a unique fingerprint.

Cite this