Abstract
In this paper, we construct new valuation schemes for the liabilities and economic capital of insurance companies. Specifically, we first build a ‘SAHARA’ valuation framework based on Symmetric Asymptotic Hyperbolic Absolute Risk Aversion utility functions. Then, we construct a ‘SAHARA-CPT’ framework that incorporates the previous utility function as a value function and that is based on Cumulative Prospect Theory. The process used for assessing a life insurance company’s own funds consists in replacing the market-consistent parametrization with a utility-consistent parametrization that accounts for the risk aversion of the market and the long-term duration of the company’s commitments. Our illustrations show that this approach leads to a lower value of the Own Risk and Solvency Assessment and to a lower volatility of own funds. The framework that is based on cumulative prospect theory has the advantage over the expected utility theory framework that it considers a precautionary overweighting of extreme events, as a tradeoff for additional model complexity.
Acknowledgments
We express our gratitude to Jérémy Allali, Philippe Desurmont, Alexandre Kozlov, François-Xavier de Lauzon, Jacques Lévy-Véhel, Hubert Rodarie, and Christian Walter for their useful comments. Special thanks to Anthony Floryszczak for substantial help and advice.
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Articles in the same Issue
- Featured Articles (Research Paper)
- Estimating China’s Future Life Insurance Market
- Hurricane Bond Price Dependency on Underlying Hurricane Parameters
- A Hybrid Equity Release Plan for Retirement Financing
- Utility-Consistent Valuation Schemes for the Own Risk and Solvency Assessment of Life Insurance Companies
- Featured Article
- An Evaluation of the New Japanese Bonus–Malus System with No-claim and Claimed Subclasses
Articles in the same Issue
- Featured Articles (Research Paper)
- Estimating China’s Future Life Insurance Market
- Hurricane Bond Price Dependency on Underlying Hurricane Parameters
- A Hybrid Equity Release Plan for Retirement Financing
- Utility-Consistent Valuation Schemes for the Own Risk and Solvency Assessment of Life Insurance Companies
- Featured Article
- An Evaluation of the New Japanese Bonus–Malus System with No-claim and Claimed Subclasses