Fair valuation of insurance liabilities: Merging actuarial judgement and market-consistency

Dhaene, Jan; Stassen, Ben; Barigou, Karim; Linders, Daniël; Chen, Ze

doi:10.1016/j.insmatheco.2017.06.003

Cited by 52 publications

(126 citation statements)

References 14 publications

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“…Fair valuation of insurance liabilities: merging actuarial judgement and market-consistency (Dhaene et al, 2017) introduces the concept of a "hybrid" insurance liability which consists of components that are hedgeable as well as components whose values are independent of the prices of tradeable assets. Methods are proposed for fair-valuing these liabilities, where "fair value" is defined as the combination of market-consistent value for hedgeable components and "actuarial value", that is, realworld expectation plus risk margin, for other components.…”

Section: G2 Academic Researchmentioning

confidence: 99%

A review of the risk margin – Solvency II and beyond

Pelkiewicz¹,

Ahmed²,

Fulcher³

et al. 2020

Br. Actuar. J.

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For life insurers in the United Kingdom (UK), the risk margin is one of the most controversial aspects of the Solvency II regime which came into force in 2016. The risk margin is the difference between the technical provisions and the best estimate liabilities. The technical provisions are intended to be market-consistent, and so are defined as the amount required to be paid to transfer the business to another undertaking. In practice, the technical provisions cannot be directly calculated, and so the risk margin must be determined using a proxy method; the method chosen for Solvency II is known as the cost-of-capital method. Following the implementation of Solvency II, the risk margin came under considerable criticism for being too large and too sensitive to interest rate movements. These criticisms are particularly valid for annuity business in the UKsuch business is of great significance to the system for retirement provision. A further criticism is that mitigation of the impact of the risk margin has led to an increase in reinsurance of longevity risks, particularly to overseas reinsurers. This criticism has led to political interest, and the risk margin was a major element of the Treasury Committee inquiry into EU Insurance Regulation. The working party was set up in response to this criticism. Our brief is to consider both the overall purpose of the risk margin for life insurers and solutions to the current problems, having regard to the possibility of post-Brexit flexibility. We have concluded that a risk margin in some form is necessary, although its size depends on the level of security desired, and so is primarily a political question. We have reviewed possible alternatives to the current risk margin, both within the existing cost-of-capital methodology and considering a wide range of alternatives. We believe that requirements for the risk margin will depend on future circumstances, in particular relating to Brexit, and we have identified a number of possible changes to methodology which should be considered, depending on circumstances.

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Section: G2 Academic Researchmentioning

confidence: 99%

A review of the risk margin – Solvency II and beyond

Pelkiewicz¹,

Ahmed²,

Fulcher³

et al. 2020

Br. Actuar. J.

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“…We can determine the charged annuity price P 0 in two steps; first, we determine an adequate hedge (see Section 3.2.1), and second, we value the residual loss using a risk measure. This approach was first proposed in Dhaene et al (2017) for hybrid claims combining actuarial and financial risks. More specifically, we define the charged annuity price P 0 as follows:…”

Section: Valuation Of the Non-hedgeable Partmentioning

confidence: 99%

“…For an introduction to the valuation of contingent claims consisting of actuarial (diversifiable) and financial (nondiversifiable) risks, we refer toTsanakas et al (2013),Stadje and Pelsser (2014),Pelsser and Salahnejhad (2016), andDhaene et al (2017).26 If g j and r tj depend on past stock return shocks, then we are typically still able to derive closed-form expressions for the annuity price and the hedging strategy. Incorporating a stochastic interest rate and a stochastic volatility will require us to determine adequate stochastic processes for these variables as well as a realistic dependence model describing the interactions between the different processes.…”

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confidence: 99%

Affordable and adequate annuities with stable payouts: Fantasy or reality?

Bilsen

Linders

2019

Insurance: Mathematics and Economics

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This paper introduces a class of unit-linked annuities that extends existing annuities by allowing portfolio shocks to be gradually absorbed into the annuity payouts. Consequently, our new class enables insurers to offer an affordable and adequate annuity with a stable payout stream. We show how to price and adequately hedge the annuity payouts in a general financial environment.In particular, our model accounts for various stylized facts of stock returns such as asymmetry and heavy-tailedness. Furthermore, the generality of our framework makes it possible to explore the impact of a parameter misspecification on the annuity price and the hedging performance.JEL Classification: G11, G13, G22. .Substituting (110) into (112), we findHence, the budget constraint can be approximated as follows:

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“…The two-step approach combines financial pricing with actuarial valuation, by first valuating, based on an actuarial premium principle, the security conditional on the future development of the financial risks, and then taking an expectation of the value under a financial-risk adjusted probability measure. Moreover, Dhaene et al (2017) also investigate the two-step valuation approach in an adapted version and show that their classes of fair valuations, hedge-based valuations, and two-step valuations are identical.…”

Section: Introductionmentioning

confidence: 99%

Cat Bond Pricing Under a Product Probability Measure With Pot Risk Characterization

Tang¹,

Yuan²

2019

ASTIN Bull.

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Frequent large losses from recent catastrophes have caused great concerns among insurers/reinsurers, who then turn to seek mitigations of such catastrophe risks by issuing catastrophe (CAT) bonds and thereby transferring the risks to the bond market. Whereas, the pricing of CAT bonds remains a challenging task, mainly due to the facts that the CAT bond market is incomplete and that the pricing usually requires knowledge about the tail of the risks. In this paper, we propose a general pricing framework based on a product pricing measure, which combines a distorted probability measure that prices the catastrophe risks underlying the CAT bond with a risk-neutral probability measure that prices interest rate risk. We also demonstrate the use of the peaks over threshold (POT) method to uncover the tail risk. Finally, we conduct case studies using Mexico and California earthquake data to demonstrate the applicability of our pricing framework.

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Fair valuation of insurance liabilities: Merging actuarial judgement and market-consistency

Cited by 52 publications

References 14 publications

A review of the risk margin – Solvency II and beyond

A review of the risk margin – Solvency II and beyond

Affordable and adequate annuities with stable payouts: Fantasy or reality?

Cat Bond Pricing Under a Product Probability Measure With Pot Risk Characterization

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