Hedging life insurance contracts in a Levy process financial market

Starting from the model of Moller [Risk-minimizing hedging strategies for unit-linked life insurance contracts. ASTIN Bulletin 28 (1998) 17-47] we derive analogously, but for an incomplete financial market, a (locally) risk-minimizing hedging strategy for unit-linked life insurance contracts represented by the pure endowment and the term insurance. The incomplete financial market is exemplarily given by a general Levy-driven model. We investigate the Follmer-Schweizer decomposition of their intrinsic value. Additionally, we compare our results to the ones obtained by Moller [Risk-minimizing hedging strategies for unit-linked life insurance contracts. ASTIN Bulletin 28 (1998) 17-47] and show how they are affected by replacing the complete financial market by an incomplete one. (c) 2006 Elsevier B.V All rights reserved.