Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model.
People going into quant finane or striving to become a quant on the other hand are often not aware that their knowledge could also be applied in an insurance context.
Classic quant-work-related topics are: options pricing, portfolio optimisation, credit risk. This topics are also ery relevant to insurers. The example below shows why. I will also add more examples later on.
Example (portfolio optimization) Consider a car insurer's portfolio. Such a portfolio consists of many individual contracts. Premium calculation is based on the equivalence principle. Premiums paid by the insured must at least cover the losses. Thus such a portfolio can generate positive or negative annual returns. Positive if premiums paid > losses, Negatative if premiums paid < losses. Also these returns change over time and are volatile. The portfolio also has a market value - even though the market is not nearly as liquid as the one for standard derivatives and the bid/ask spreads can be huge. Still, one can interpret one such portfolio as a stock with possible negative dividend.
A reinsurance company often holds fractions of such portfolios. Thus to optimize the potfolio structure they can apply portfolio-optimization theory. As far as I know there are even a couple of reinsurers out there that actually do that.
Literature: (some books and papers to showcase the interfacing of actuarial evaluation and derivatives pricing techniques)
- On Valuation and Risk Management at the Interface of Insurance and Finance (suggested in the comments)
- Pricing and Hedging Variable Annuities (because of the comprehensive list of references)
- ON THE RISK-NEUTRAL VALUATION OF LIFE INSURANCE CONTRACTS WITH NUMERICAL METHODS IN VIEW (application of monte carlo least squares to the pricing of early ecercise features inbedded in in life insurance contracts)
Questions:
- Literature suggestions on the application of option pricing, portfolio optimization etc. to insurance related topics
- Further examples as the one above
- What could quants working for banks/funds learn from actuaries ?