Actuarial and Financial Modeling
In this chapter we lay the basis for actuarial valuation. We introduce the notion of financial risk and insurance technical risk. Such a split is crucial because it explains which risks can be hedged at financial markets and which risks cannot be hedged and need to be absorbed by the insurance company. This will result in the split of the filtration into a financial filtration and an insurance technical filtration which describe the corresponding flow of information. Moreover, the previously introduced state price deflator receives a deeper meaning in terms of a financial deflator and a probability distortion. The former describes price formation at financial markets, the latter describes margins for non-hedgeable risks.
KeywordsCash Flow Financial Market Product Structure Price Process Insurance Liability
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