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Über dieses Buch

When "Financial Risk in Insurance" appeared in 1995, we would not have imag­ ined that this text would find such a wide readership. After all actuarial col­ leagues had received the text automatically through their subscription to the 1993 AFIR colloquium in Rome. So the demand must have come from outside of our own professional circles, we believe from researchers and practitioners in finance. Both in 1996 and 1997 further copies needed to be printed. We therefore applaud the initiative by Springer to make this text available in the form of a soft-cover edition. We hope that this new edition will further contribute to the very fruitful dialogue between actuaries and professionals in finance and will be helpful in the cultural thought process bringing the world of banking and insurance closer to each other. Zurich, 1 June, 1999 In the name of the authors Hans Buhlmann Preface The Istituto Nazionale delle Assicurazioni (INA), a leading company on the Ital­ ian life insurance market for over eighty years, takes special pleasure in sponsor­ ing this scientific volume meant for the large international community of those concerned with insurance and finance. Our involvement in this initiative is directly connected with the awareness that the domain of insurance, in particular with respect to the management of long-term insurance savings, is changing. This enlargement, emphatically notice­ able in the area of life insurance and pension funding, is extending to cover also the "interest rate risk" .



Life Insurance with Stochastic Interest Rates

The basic building stones of the model are the individual policies. Each policy defines a stream of stochastic cash payments in the time points 0, 1, …, n.
Hans Bühlmann

Analyzing Default-Free Bond Markets by Diffusion Models

In this paper we shall illustrate how diffusion models can be used to extract the term structure of interest rates from observed prices and to determine theoric prices and risk measures of term-structure derivatives. We shall assume throughout that the risk of default can be ignored.
Franco Moriconi

Risk-based Capital for Financial Institutions

The issue of risk-based capital for financial institutions is of considerable current interest. We discuss how the option pricing paradigm provides a theoretical framework for the analysis of this topic. The modern approach to option pricing which was inspired by the seminal work of Black and Scholes has revolutionized our approach to both the theory and practice of many aspects of investment finance and corporate finance.
Phelim P. Boyle

Immunization Theory: An Actuarial Perspective on Asset-Liability Management

Actuarial Traditions. The management of interest rate risk is a problem with deep roots in the actuarial literature. The results by Redington (1952) and by Haynes and Kirton (1952) may be considered path-breaking on a problem that, even then, “for many years must have intrigued so many actuaries”1. The purpose of their work is to analyse the financial structure of a life office and, in particular, the relationship between the assets and liabilities of a life assurance fund. The specific problem is how to determine the allocation of assets to make them, as far as possible, equally as vulnerable as the liabilities to those influences (typically the effects of fluctuations in the market rate of interest) which affect both. Redington adopts the word “immunization, to signify the investment of the assets in such a way that the existing business is immune to a general change in the rate of interest”2. Haynes and Kirton use the word “insulation” in a similar way. It is remarkable to consider how closely both the authors agreed in their fundamental conclusions. But it is also relevant, for critical purpose and for the sake of theory, to remark the difference in the approach to the problem: Haynes and Kirton paper “dealt primarily with matching, valuation being a by-product”, while Redington’s paper “dealt primarily with valuation, matching being a by-product”3. The first approach led to the development of strategies for cash-flow matching4. The second, which the present paper is concerned with, recognizes the central role of bond pricing theory and of models of the term structure of interest rates, which have undergone a strong development in the last twenty years.
Massimo De Felice

Financial Risk, Financial Intermediaries and Game Theory

Financial intermediaries exist and were already studied well before the second half of our twentieth century. Yet in the last fifty years many new and more precise insights on financial institutions have been derived exploiting results obtained by researchers of the scientific area defined (more or less precisely) as modern-quantitative finance.
Flavio Pressacco
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