MCFAM Seminar - Hedging universal life insurance policies
Speaker: Emmanuel Hamel
Abstract: This talk explores hedging procedures for Universal Life (UL) insurance contracts. Risk related to guarantees embedded in UL policies are typically managed through conventional means by insurers, such as reserving, capital buffers, and the use of natural hedges. We outline that hedging can be a useful risk management tool to mitigate risk associated with UL policies. We explore two hedging approaches: a static hedging procedure based on a portfolio of zero-coupons bonds and a dynamic hedging approach relying on the sequential rebalancing of liquid swap portfolios. Both strategies are shown to successfully reduce loss variability, even when relying on a low number of hedging instruments. In our setting, the dynamic approach provides the best performance.