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Fair valuation of insurance liabilities: Merging actuarial judgement and market-consistency

Author

Listed:
  • Jan Dhaene
  • Ben Stassen
  • Karim Barigou
  • Daniël Linders
  • Ze Chen

Abstract

In this paper, we investigate a single period framework for the fair valuation of the liabilities related to an insurance policy or portfolio.We de ne a fair valuation as a valuation which is both market-consistent (mark-to-market for hedgeable claims)and actuarial (mark-to-model for unhedgeable claims). We introduce the class of hedge-based valuations, where in a rst step of the valuation process, a best hedge for the liability is set up, based on the traded assets in the market, while in a second step, the remaining part of the claim is valuated via an actuarial valuation. We also introduce the class of two-step valuations, the elements of which are closely related to the two-step valuations which were introduced in Pelsser and Stadje (2014). We show that the 3 classes of fair, hedge-based and two-step valuations are identical.

Suggested Citation

  • Jan Dhaene & Ben Stassen & Karim Barigou & Daniël Linders & Ze Chen, 2017. "Fair valuation of insurance liabilities: Merging actuarial judgement and market-consistency," Working Papers Department of Accountancy, Finance and Insurance (AFI), Leuven 578281, KU Leuven, Faculty of Economics and Business (FEB), Department of Accountancy, Finance and Insurance (AFI), Leuven.
    • Handle: RePEc:ete:afiper:578281
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