FIE462 Finance Innovations in Insurance

Spring 2025

Autumn 2024

Topics
The course emphasises similarities and differences between insurance and standard finance. Common for insurance and standard finance are assessment, pricing and sharing of risk. Financial risk can sometimes be traded in financial markets. Although, insurance risk also is traded, it is usually not traded in markets in the same way as financial risk.

The course starts with an overview over finance products with insurance elements (e.g, options, CDOs) and insurance products with finance elements .(e.g., life insurance and pensions). To price these products we use two approaches:First, binomial pricing and the Black and Scholes model known from finance. Second, equivalence and loadings principles from the actuarial sciences and the economics of insurance.

Next, the course covers topics from corporate finance. Stylised financial balance sheets of insurance companies are analysed to understand basic risk mechanisms of insurance. In particular, we revisit some standard corporate finance concepts for an insurance company. In the same framework, we also address how a firm may benefit from buying firm insurance.

The major part of the course is based on cases from the insurance industry. Each case will typically be introduced by a representative from an insurance company/industry, before it is covered in class.

Examples of cases:
- Insurance regulation (Solvency II, IFRS 17, IORP II).
- Climate risk.
- Interest rate guarantees.
- Directors’ and officers’ liability insurance.
- Reverse mortgages.
All cases represent recent challenges for the insurance industry and requires knowledge about finance as well as insurance. This course is suitable for students who are interested in risk, finance and insurance.
Learning outcome
After successfully completing the course, the candidate:

Knowledge
- Has detailed knowledge about current challenges in the insurance industry.
- Has knowledge about pricing methods used in insurance and standard finance.
- Understands basic credit risk models.
Skills
- Can calculate optimal firm financing in stylised structural models.
- Can use stock data to estimate credit spreads, debt values, and values of insurance portfolios.
- can quantify effects of selected risk management and insurance strategies .
General competence
- Can communicate and discuss challenges faced by the insurance industry with a professional audience.
- Understand how risk influences the cost of capital, pricing of products, and the liability structure in a firm's financial balance sheet.
Teaching

Lectures organised by cases.

Guest-lectures motivates the cases.

The course is taught by lectures 2x45 minutes, twice a week.
Recommended prerequisites

The course is intended for students with interest in insurance and basic knowledge in finance,

No restrictions to specific courses, but this course may supplement other insurance courses (e.g., ECO440 Economics of Uncertainty and Insurance and FIE 461 Risk and insurance).
Compulsory Activity

One group assignment.
Assessment

Individual 4 hour take home exam.
Grading Scale

A-F
Computer tools

Excel sheets are used extensively.

Some examples may be illustrated with the use of routines from a programming language.
Literature

Briys, de Varenne, 2001, Insurance: From Underwriting to Derivatives: Asset Liability Management in Insurance Companies, John Wiley.

Eechoudt, Gollier, Schlesinger, 2005, Economic and Financial Decisions under Risk, Princeton University Press.

Knut K. Aase. Negative volatility and the survival of the western financial markets. In Espen Gaarder Haug, editor, Derivatives Models on Models, chapter 11, pages 239-246. John Wileys & Sons Inc, 2007.

Jonathan Berk and Peter DeMarzo. Corporate Finance. Pearson, 5 edition, 2019. Sreedhar T. Bharath and Tyler Shumway. Forecasting default with the merton distance

to default model. The Review of Financial Studies, 21:1339-1369, 2008.Louis Eeckhoudt, Christian Gollier, and Harris Schlesinger. Economic and Financial

Decisions under Risk. Princeton University Press, 2005.Julie Østraat Formo and Erlend Haugan. Litigation risk in directors and officers liability insurance. Master’s thesis, NHH, 2021.

Espen Gaarder Haug. A look in the antimatter mirror. Wilmott Magazine, pages 38-42, September 2002.

Alexandra Hermann, Peter Koferl, and Jan Philip Mairhofer. Climate risk insurance:New approaches and schemes. Technical report, working paper, Allianz, 2016.

John C. Hull. Options, Futures, and Other Derivatives. Wiley New York, 11 edition, 2022.

Emirhan Ilhan. Sea level rise and portfolio choice. Technical report, Job market paper, Frankfurt School of Finance & Management., 2021.

Maximilian Jager. Clear(ed) decision: The effect of central clearing on firms? financing decision. Technical report, Job market paper, University of Mannheim., 2021.

Chen Lin, Micah S. Officer, Rui Wang, and Hong Zou. Directors’ and officers’ liability insurance and loan spreads. Journal of Financial Economics, 110(1):37-60, 2013.

Robert C. Merton and Rose Neng Lai. On an efficient design of reverse mortgages: A possible solution for aging asian populations. Technical report, working paper, Massachusetts Institute of Technology and University of Macau, 2017.

Kristian R. Miltersen and Svein-Arne Persson. Pricing rate of return guarantees in a heath-jarrow-morton framework. Insurance: Mathematics and Economics, 25(3): 307-325, 1999.

Kristian R. Miltersen and Svein-Arne Persson. Guaranteed investment contracts: Dis- tributed and undistributed excess return. Scandinavian Actuarial Journal, 2003(4): 257-279, 2003.

Ragnar Norberg. Basic life insurance mathematics. Downloadable textbook, University of Copenhagen, 2002.

Helge A. Nordahl. Hvorfor kjøper bedrifter forsikring? Magma, 18(8):35-43, 2015.

Maria Vassalou and Yuhang Xing. Default risk in equity returns. The Journal of Finance, 59:831-868, 2004.

(revised reading list will be available when the course starts)
Permitted Support Material

No restrictions.