Utility maximization and risk minimization in life and pension insurance (Q2488507)

The author considers an optimisation problem for a life insurance company or pension fund where the individual policy risk is taken explicitly into account. He works with a general participating or with a profit multi-state policy, characteristics of which are its contractual payment streams with built-in safety margins leading to the emergence of systematic surplus which then forms a source of bonus benefits paid to the policy holder in addition to the contractual benefits. The company faces an overall problem involving two concerns: optimisation on behalf of the insured and optimisation for the company itself according to suitable criteria. A two-step solution approach is proposed. The first step consists in utility maximization of the benefit stream for the insured through dividend allocation which is a widely used method of surplus redistribution. This step is based on a martingale methodology and convex analysis methods. The second step consists in treating the optimal benefit stream obtained at the first step as a given (random) liability on the part of the company and determining an invest strategy that takes this liability into account and is optimal for the company in a suitable sense. This leaves the company with a non-hedgeable liability, for which two quadratic hedging approaches are discussed. General results on dividend optimisation and semi-explicit expressions for the optimal bonus and investment strategies are obtained.