Market-Consistent Valuation of Insurance Contracts. Antoon Pelsser Professor of Actuarial Science University of Amsterdam & Netspar. Historical Roots: Actuarial & Finance Collapse of Equitable Life Market-Consistent Valuation New Directions for Actuaries. Outline.
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Professor of Actuarial Science
University of Amsterdam & Netspar
Derivative pricing via “Delta-Hedging”
Completely different methodology of dealing with risk!
Reduce risk via offsetting trading-positions
1980+: Development of risk-management and supervision in bankingHistorical Roots: Finance
Severe criticism in UK on the profession
Morris Review of the Actuarial Profession
Market risks are often larger than insurance risks
Regulators push for Market-Consistent Valuation
Denmark, Switzerland, UK, Netherlands
Europe → Solvency II
IASB → Accounting of Insurance ContractsWake-Up Call for Actuaries
Discount cash flows with today’s term structure of interest rates
Calculate value of embedded options with arbitrage-free pricing
Different from “classical” Embedded ValueMarket-Consistent Valuation
Important steps have already been made
Continuing improvement in the curriculum needed
Change from “risk observer” to “risk manager”
“Reserve for the risk & wait”…
Change in attitude is not easy
Use active risk management (for financial risks)New Directions for Actuaries
How to deal with Internal Models?
New proposal from IASB is fully consistent with market-consistent principles
No consensus (yet) on how to calculate “the” Market-Consistent value:
Own Credit Rating
Market Value MarginNew Directions… (2)
Every insurance contract can be replicated by financial instruments
This is not true for insurance!
Pricing rules in “incomplete” markets
Mortality risk & trends
(Irrational) Policyholder behaviour
“With-Profits” contractsNew Directions… (3)