Promises to pay claims from covered risks

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Reference no: EM131039548

An insurance policy, for an up-front fee, promises to pay claims from covered risks, if loss occurs within a specified time. The policyholder must notify the insurer for the policy to pay. The policy is subject to a deductible and a limit. Spreadsheet Insurance Policy Payoff shows the payoff from a hypothetical policy. Can you replicate this payoff (as close as you can) using derivatives? If you are able to replicate the payoff with derivatives, why not then use option-pricing techniques to price traditional insurance? Use the spreadsheet Interactive Payoff to help you (if you need help) replicate the insurance payoff with derivatives.

Reference no: EM131039548

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