The Pricing of Insurance‐Linked Securities Under Interest Rate Uncertainty

Abstract

In this article, the authors develop an arbitrage approach to valuing insurance‐linked securities (ILS) for non‐catastrophic events within a framework of stochastic interest rates. The prices of these transactions are driven by both an interest rate process and a non‐trivial actuarial risk process. The authors find that the duration of ILS is, in most cases, higher than the Macaulay duration of risk‐free bonds, which implies that the alleged relative out‐performance of ILS is illusory.

Citation

PONCET, P. and VAUGIRARD, V.E. (2002), "The Pricing of Insurance‐Linked Securities Under Interest Rate Uncertainty", Journal of Risk Finance, Vol. 3 No. 3, pp. 48-59. https://doi.org/10.1108/eb043494