Portfolio insurance and model uncertainty

Some real-world insurance products contain a minimum-wealth or an income-stream guarantee, both of which have to be met irrespective of capital market conditions. Therefore, sellers of such products are well advised to pursue a portfolio strategy that can meet these minimum investment goals if they want to avoid additional cash payments. Portfolio Insurance seems to be the solution to this portfolio problem. However, this paper shows that Portfolio Insurance cannot protect minimum investment goals because its strategies are fitted to a particular form of market risk. Decision makers do not know for sure (with probability one) what the true form of market risk is (model uncertainty); thus model uncertainty makes Portfolio Insurance fail.