Annals of Finance

, Volume 10, Issue 2, pp 315–332 | Cite as

Pricing and managing risks of ruin contingent life annuities under regime switching variance gamma process

Research Article


We propose a model for valuing ruin contingent life annuities under the regime-switching variance gamma process. The Esscher transform is employed to determine the equivalent martingale measure. The PIDE approach is adopted for the pricing formulation. Due to the path dependency of the payoff of the insurance product and the non-existence of a closed-form solution for the PIDE, the finite difference method is utilized to numerically calculate the value of the product. To highlight some practical features of the product, we present a numerical example. Finally, we examine numerically the performance of a simple hedging strategy by investigating the terminal distribution of hedging errors and the associated risk measures such as the value at risk and the expected shortfall. The impacts of the frequency of re-balancing the hedging portfolio on the quality of hedging are also discussed.


Ruin contingent life annuity Regime switching variance gamma Esscher transform Pricing and risk management 

JEL Classification

G13 G22 D52 


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Department of Applied Finance and Actuarial Studies, Faculty of Business and EconomicsMacquarie UniversitySydneyAustralia

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