On the Risk of Insurance Liabilities: Debunking Some Common Pitfalls

TLDR

The article develops a life‑insurance liability valuation model that debunks common pitfalls in the industry. The model employs a contingent.

Abstract

This article develops a life inisuranice liabilities valuiation model that debuinks some pitfalls commoinly enicouintered in the iinsurance iinduistry. Using a contiingeint claim based metlhodology, a fairly simple closedfonn solution for the pricing of life insuraince liabilities is obtaiined. Because it accounits for stoclhastic initerest rates, default risk, and bonus sclhemes, this model produices more accuirate iinterest rate elasticity aind duiratioin meastures. The effective dulratioii of life inisuiranice liabilities is shovwn to be significanitly difTerenit fromi tlle traditioiial Macatilay duratioin measure. For reasoniable sets of parameters, equity is shown