The value of a liability cash flow in discrete time subject to capital requirements

Hampus Engsner (), Kristoffer Lindensjö () and Filip Lindskog ()
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Hampus Engsner: Stockholm University
Kristoffer Lindensjö: Stockholm University
Filip Lindskog: Stockholm University

Finance and Stochastics, 2020, vol. 24, issue 1, No 4, 125-167

Abstract: Abstract The aim of this paper is to define the market-consistent multi-period value of an insurance liability cash flow in discrete time subject to repeated capital requirements, and explore its properties. In line with current regulatory frameworks, the presented approach is based on a hypothetical transfer of the original liability and a replicating portfolio to an empty corporate entity, whose owner must comply with repeated one-period capital requirements but has the option to terminate the ownership at any time. The value of the liability is defined as the no-arbitrage price of the cash flow to the policyholders, optimally stopped from the owner’s perspective, taking capital requirements into account. The value is computed as the solution to a sequence of coupled optimal stopping problems or, equivalently, as the solution to a backward recursion.

Keywords: Market-consistent valuation; Replicating portfolios; Capital requirements; 91G50; 91G20; 91B74 (search for similar items in EconPapers)
JEL-codes: G13 G22 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s00780-019-00408-0

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