Market valuation in the framework of modern life insurance mathematics

In the traditional actuarial life insurance mathematics, liabilities to beneficiaries (technical reserves) are calculated based on conservative assumptions of mortality and interest rates. However, this approach was found to be incomplete since it does not contain the market component which has beco...

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Bibliographic Details
Published in:Ekonomski vjesnik 2013-12, Vol.XXVI (2), p.620-620
Main Author: Maja Petrač
Format: Article
Language:English
Subjects:
market valuation
modern life insurance mathematics
principle of equivalence
Solvency II
Online Access:Get full text
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Summary:In the traditional actuarial life insurance mathematics, liabilities to beneficiaries (technical reserves) are calculated based on conservative assumptions of mortality and interest rates. However, this approach was found to be incomplete since it does not contain the market component which has become essential due to the development of the financial market. Since about 80% of total liabilities of life insurance companies are made up of technical reserves, this issue has a major impact on the overall performance of insuran - ce companies. The introduction of financial components into the actuarial valuation resulted in actuarial mathematics using more and more the elements of financial mathematics thus creating new, modern life insurance mathematics. Using a simple example, this paper compares the traditional and market approaches to valuation. For this purpose, one of the principles of modern life insurance mathematics, the principle of equivalence, was observed. The above market approach to valuation, together with operational risk management, forms the basis of Solvency II Directive, the new legislative and regulatory framework for insurance and reinsurance companies in the European Union.
ISSN:0353-359X
1847-2206