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

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

No 578281, Working Papers Department of Accountancy, Finance and Insurance (AFI), Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Accountancy, Finance and Insurance (AFI), Leuven

Abstract: In this paper, we investigate a single period framework for the fair valuation of the liabilities related to an insurance policy or portfolio.We de ne a fair valuation as a valuation which is both market-consistent (mark-to-market for hedgeable claims)and actuarial (mark-to-model for unhedgeable claims). We introduce the class of hedge-based valuations, where in a rst step of the valuation process, a best hedge for the liability is set up, based on the traded assets in the market, while in a second step, the remaining part of the claim is valuated via an actuarial valuation. We also introduce the class of two-step valuations, the elements of which are closely related to the two-step valuations which were introduced in Pelsser and Stadje (2014). We show that the 3 classes of fair, hedge-based and two-step valuations are identical.

Keywords: Fair valuation of insurance liabilities; market-consistent valuation; actuarial valuation; Solvency II; mean-variance hedging (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ias and nep-rmg
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Published in FEB Research report AFI_17112 , pages 1-33

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Journal Article: Fair valuation of insurance liabilities: Merging actuarial judgement and market-consistency (2017)
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