Financial Engineering and the Japanese Financial Industry - Toward Finansurance

From a viewpoint of a financial engineering paradigm, we develop an argument on recent movements in finance and insurance in Japan. Our argument is made in view of risk and functional finance for the efficiency of capital. Among others, we foresee a convergence of finance and insurance to “finansurance” in near future, in which households and firms optimize their overall risk positions in life-cycle and business. It is also argued that financial technology together with information technology accelerates the trend of functional finance and will provide products to complete an incomplete system for risk optimization. Analytically we observe that a discrete time approach to credit risk analysis in financial engineering makes a bridge between finance and insurance and demonstrate the valuation of the premium of a life insurance and the price of an earthquake bond via the no-arbitrage concept.