Hedging and Reserving for Single-Premium Segregated Fund Contracts

Abstract

Abstract Three methods for determining suitable provision for maturity guarantees for single-premium segregated fund contracts are compared. Actuarial reserving assumes funds are held in risk-free assets, to give a prescribed probability of meeting the guarantee liability. Dynamic hedging uses the Black-Scholes framework to determine the replicating portfolio. Static hedging assumes a counterparty is willing to sell the options required to meet the guarantee. Using a stochastic cash flow projection, we consider how to assess which approach is most profitable. The example given assumes a typical Canadian segregated fund contract.