Insurance valuation: a computable multi-period cost-of-capital approach
Abstract
We present an approach to market-consistent multi-period valuation of insurance liability cash flows based on a two-stage valuation procedure. First, a portfolio of traded financial instrument aimed at replicating the liability cash flow is fixed. Then the residual cash flow is managed by repeated one-period replication using only cash funds. The latter part takes capital requirements and costs into account, as well as limited liability and risk averseness of capital providers. The cost-of-capital margin is the value of the residual cash flow. We set up a general framework for the cost-of-capital margin and relate it to dynamic risk measurement. Moreover, we present explicit formulas and properties of the cost-of-capital margin under further assumptions on the model for the liability cash flow and on the conditional risk measures and utility functions. Finally, we highlight computational aspects of the cost-of-capital margin, and related quantities, in terms of an example from life insurance.
Keywords
Cite
@article{arxiv.1607.04100,
title = {Insurance valuation: a computable multi-period cost-of-capital approach},
author = {Hampus Engsner and Mathias Lindholm and Filip Lindskog},
journal= {arXiv preprint arXiv:1607.04100},
year = {2016}
}