Replicating embedded options
Insurance companies invested heavily in stochastic models. The next horizon is to embed these models more deeply into asset liability management processes. The authors believe that the replicating portfolio is a powerful tool to establish these links
Introduction
The management of options and guarantees embedded in life insurance policies is now broadly recognised as central to asset liability management of insurance companies. The industry has tremendously improved its capabilities in this area over the past couple of years. The CRO Forum study on financial risk mitigation (CRO Forum (2006)) shows that the industry's view on how to manage options and guarantees is converging, and asks regulators to provide incentives for risk mitigating
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