On the optimal product mix in life insurance companies using conditional value at risk

Abstract

This paper proposes a Conditional Value-at-Risk Minimization (CVaRM) approach to optimize an insurer's product mix. By incorporating the natural hedging strategy of Cox and Lin (2007) and the two-factor stochastic mortality model of Cairns et?al. (2006b), we calculate an optimize product mix for insurance companies to hedge against the systematic mortality risk under parameter uncertainty. To reflect the importance of required profit, we further integrate the premium loading of systematic risk. We compare the hedging results to those using the duration match method of Wang et?al. (forthcoming), and show that the proposed CVaRM approach has a narrower quantile of loss distribution after hedging-thereby effectively reducing systematic mortality risk for life insurance companies. ? 2009 Elsevier B.V. All rights reserved.