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 gfinansuranceh in near future, in which households and firms will be able to more efficiently optimize their overall risk-return positions in life-cycle and business. It is also argued that financial technology together with information technology accelerates the trend of the functional finance and will provide products to complete an incomplete system for risk optimization. A theoretical justification is given for a finanssurance business. In addition, we demonstrate 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.
In addition, valuation problems in weather derivatives, CBO (collateralized bond obligations), mortgage backed securities, real estate are discussed in association with the Japanese practices.
