Compositions of Conditional Risk Measures and Solvency Capital

Abstract

Abstract:In this paper, we consider compositions of conditional risk measures in order to obtain time-consistent dynamic risk measures and determine the solvency capital of a life insurer selling pension liabilities or a pension fund with a single cash-flow at maturity. We first recall the notion of conditional, dynamic and time-consistent risk measures. We link the latter with its iterated property, which gives us a way to construct time-consistent dynamic risk measures from a backward iteration scheme with the composition of conditional risk measures. We then consider particular cases with the conditional version of the value at risk, tail value at risk and conditional expectation measures. We finally give an application of these measures with the determination of the solvency capital of a pension liability, which offers a fixed guaranteed rate without any intermediate cash-flow. We assume that the company is fully hedged against the mortality and underwriting risks.

Special Issue “Actuarial and Financial Risks in Life Insurance, Pensions and Household Finance”

“…Pierre Devolder and Adrièn Lebegue (Devolder and Lebègue 2016), in their contribution, study compositions of time-consistent dynamic risk measures, a crucial issue insurance companies have to tackle when computing their economic capital.…”