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A Dynamic Solvency Approach for Life Insurance

Author

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  • Cocozza, Rosa
  • Di Lorenzo, Emilia

Abstract

The paper investigates risk management processes in life insurance, in a perspective consistent with the framework of Solvency II. The paper starts with the breakdown of the business dynamics. This analysis provides for a complete depiction of risk and value driver within life business. The corresponding map is then put into the solvability context, in order to formally identify the equilibrium conditions. Considerations about the technical equilibrium of an insurance portfolio and the financial regulation lead to a dynamic system of solvency assessment. The formal model is applied to a life annuity cohort in a stochastic context in order to exemplify the potential of the model, especially referred to the need to frame solvency assessment in a dynamic perspective.

Suggested Citation

  • Cocozza, Rosa & Di Lorenzo, Emilia, 2007. "A Dynamic Solvency Approach for Life Insurance," MPRA Paper 28015, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28015
    as

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    References listed on IDEAS

    as
    1. David Babbel & Craig Merrill, 1998. "Economic Valuation Models for Insurers," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(3), pages 1-15.
    2. Emilia Di Lorenzo & Marilena Sibillo & Gerarda Tessitore, 1999. "A stochastic model for financial evaluation: applications to actuarial contracts," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 15(4), pages 269-275, October.
    3. Luke Girard, 2000. "Market Value Of Insurance Liabilities," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(1), pages 31-49.
    4. David Babbel & Jeremy Gold & Craig Merrill, 2002. "Fair Value of Liabilities: The Financial Economics Perspective," North American Actuarial Journal, Taylor & Francis Journals, vol. 6(1), pages 12-27.
    5. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
    6. Panna Sharma, 2002. "The Sharma Group," Palgrave Macmillan Books, in: Management Consultancy, chapter 26, pages 193-196, Palgrave Macmillan.
    7. Parker, Gary, 1994. "Limiting Distribution of the Present Value of a Portfolio," ASTIN Bulletin, Cambridge University Press, vol. 24(1), pages 47-60, May.
    8. David F. Babbel & Anthony M. Santomero, 1997. "Risk Management by Insurers: An Analysis of the Process," Center for Financial Institutions Working Papers 96-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
    9. Elton, Edwin J. & Gruber, Martin J., 1992. "Optimal investment strategies with investor liabilities," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 869-890, September.
    10. Mariarosaria Coppola & Emilia Di Lorenzo & Marilena Sibillo, 2003. "Stochastic analysis in life office management: applications to large annuity portfolios," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 19(1), pages 31-42, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Life insurance; financial risk; insolvency risk; capital adequacy; financial regulation;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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