Market inconsistencies of the market-consistent European life insurance economic valuations: pitfalls and practical solutions

Nicole El Karoui, Stéphane Loisel, Jean-Luc Prigent and Julien Vedani ()
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Nicole El Karoui: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique
Julien Vedani: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

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Abstract: The Solvency II directive has introduced a specific so-called risk-neutral framework to valuate economic accounting quantities throughout European life insurance companies. The adaptation of this theoretical notion for regulatory purposes requires the addition of a specific criterion, namely the market-consistency, in order to objectify the choice of the valuation probability measure. This paper aims at pointing out and fixing some of the major risk sources embedded in the current regulatory life insurance valuation scheme. We compare actuarial and financial valuation schemes. We then address first operational issues and potential market manipulation sources in life insurance, induced by both theoretical and regulatory pitfalls. For example, we show that calibrating the interest rate model in October 2014 instead of December 31 st 2014 generates a 140%-increase in the economic own funds of a representative French life insurance company. We propose various adaptations of the current implementations, including product-specific valuation scheme, to limit the impact of these market-inconsistencies.

Keywords: risk-neutral valuation; economic valuation; market-consistency; European regulation; life insurance (search for similar items in EconPapers)
Date: 2017
Note: View the original document on HAL open archive server: https://hal.science/hal-01242023v1
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Citations: View citations in EconPapers (19)

Published in European Actuarial Journal, 2017, 7 (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01242023

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