Market Value Margin calculations under the Cost of Capital approach within a Bayesian chain ladder framework

Christian Y. Robert

Insurance: Mathematics and Economics, 2013, vol. 53, issue 1, 216-229

Abstract: In the Solvency II framework, insurance companies need to calculate the Best Estimate valuation of Liabilities (BEL) and the Market Value Margin (MVM) for non-hedgeable insurance-technical risks. The Cost-of-Capital approach defines the MVM as the present value of the current and future Solvency Capital Requirement (SCR) of the non-hedgeable risks to protect against adverse developments in the run-off of the insurance liabilities. However the SCR at time t itself depends on the increase in the MVM between t and t+1. Hence there exists an intricate circularity dependency between both quantities. In this paper we present exact and accurate approximate analytic formulas for MVMs within a Bayesian log-normal chain ladder framework.

Keywords: Market Value Margin; Cost of Capital approach; Solvency Capital Requirement; Bayesian log-normal chain ladder model (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:53:y:2013:i:1:p:216-229

DOI: 10.1016/j.insmatheco.2013.05.003

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