Fair Dynamic Valuation of Insurance Liabilities: A Loss Averse Convex Hedging Approach

Chen, Ze; Chen, Bingzheng; Dhaene, Jan

doi:10.2139/ssrn.3517693

Cited by 6 publications

(7 citation statements)

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“…Pelkiewicz et al, 2020 for a review on the Solvency II risk margin). In the literature, different approaches were considered to value the residual risk, either by an Esscher valuation operator (Deelstra et al, 2020), a standard-deviation principle (Barigou and Delong, 2020, Ghalehjooghi and Pelsser, 2021, Chen et al, 2020, Delong et al, 2019b, or a cost-of-capital principle (Pelsser, 2011).…”

Section: Discussionmentioning

confidence: 99%

“…However, there is still an open debate on how to appropriately treat the residual part and define an appropriate "risk margin" (see e.g., Pelkiewicz et al, 2020 for a review on the Solvency II risk margin). In the literature, different approaches were considered to value the residual risk, either by an Esscher valuation operator (Deelstra et al, 2020), a standard-deviation principle (Delbaen et al, 2019b;Barigou and Delong, 2020;Chen et al, 2020;Ghalehjooghi and Pelsser, 2021) or a cost-of-capital principle (Pelsser, 2011).…”

Section: Discussionmentioning

confidence: 99%

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Insurance Valuation: A Two-Step Generalised Regression Approach

Barigou¹,

Bignozzi²,

Tsanakas³

2021

ASTIN Bull.

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Current approaches to fair valuation in insurance often follow a two-step approach, combining quadratic hedging with application of a risk measure on the residual liability, to obtain a cost-of-capital margin. In such approaches, the preferences represented by the regulatory risk measure are not reflected in the hedging process. We address this issue by an alternative two-step hedging procedure, based on generalised regression arguments, which leads to portfolios that are neutral with respect to a risk measure, such as Value-at-Risk or the expectile. First, a portfolio of traded assets aimed at replicating the liability is determined by local quadratic hedging. Second, the residual liability is hedged using an alternative objective function. The risk margin is then defined as the cost of the capital required to hedge the residual liability. In the case quantile regression is used in the second step, yearly solvency constraints are naturally satisfied; furthermore, the portfolio is a risk minimiser among all hedging portfolios that satisfy such constraints. We present a neural network algorithm for the valuation and hedging of insurance liabilities based on a backward iterations scheme. The algorithm is fairly general and easily applicable, as it only requires simulated paths of risk drivers.

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Section: Discussionmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Insurance Valuation: A Two-Step Generalised Regression Approach

Barigou¹,

Bignozzi²,

Tsanakas³

2021

ASTIN Bull.

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“…Adding a risk margin. As already mentioned, premiums in practice consist of a basic part and a part covering risk margins (and possibly other costs), see also the discussion in Chen et al (2020). We elaborate shortly on the non-linear valuation of the risk margin here.…”

Section: 4mentioning

confidence: 98%

“…Fourth, indifference pricing leads to a non-linear pricing rule and we refer to Blanchet-Scalliet et al (2015), Chevalier et al (2016) for details and further literature. Finally, there are valuation methodologies utilizing risk measures, often based on an axiomatic view, see Tsanakas and Desli (2005), Pelsser and Stadje (2014), or on hedging, see Chen et al (2020).…”

Section: Introductionmentioning

confidence: 99%

No Arbitrage in Insurance and the QP-Rule

2020

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“…Then, the two papers Delong et al (2019aDelong et al ( , 2019b extends the the one-period setting into multi-period using the similar backward iteration method. For further studies the readers can see Deelstra et al (2019), , and Chen et al (2020).…”

Section: Introductionmentioning

confidence: 99%

Time-consistent and market-consistent actuarial valuation of the participating pension contract

Ghalehjooghi

Pelsser

2020

Scandinavian Actuarial Journal

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The regulator in Europe calls for the market-consistent valuation of the insurance liabilities that usually are not (fully) tradable. An example of such liabilities is the participating pension contract that is generally longdated and vulnerable to the medium-time dynamics of the underlying risk drivers. Dealing with these characteristics requires time-consistent pricing. However, the well-known non-linear premium principles, often used as pricing operators, are not time-consistent. Based on this motivation, we study the time-consistent and market-consistent (TCMC) actuarial valuation of the participating pension contracts with hybrid payoff. We use a standard profit-sharing mechanism with guaranteed interest rate, and generalize it to a hybrid profit-sharing mechanism with the actuarial and hedgeable financial risks, over the course of the contract. Market-consistency is maintained by "two-step actuarial valuation" in a one-period setting. Time-consistency is obtained by a "backward iteration" of these one-period two-step valuations over the predetermined sub-intervals of the valuation period. We use the Least-Square Monte-Carlo method to implement the conditional operators in the backward iteration. We compare the results of TCMC price to the expected value of the discounted payoff and measure the relative risk loading and time-consistency risk premium. Besides, we investigate the effect of the stochastic interest rate as compared to the deterministic one.

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Fair Dynamic Valuation of Insurance Liabilities: A Loss Averse Convex Hedging Approach

Cited by 6 publications

References 0 publications

Insurance Valuation: A Two-Step Generalised Regression Approach

Insurance Valuation: A Two-Step Generalised Regression Approach

No Arbitrage in Insurance and the QP-Rule

Time-consistent and market-consistent actuarial valuation of the participating pension contract

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