Replication of Insurance Liabilities

Abstract

Finally, Stéphane Daul and Elena Gutíerrez Vidal present a set of case studies on insurance liability replication. Under modern valuation conventions, insurance firms increasingly use market-consistent techniques to value both their assets and liabilities. Consequently, the market sensitivities of both sides of the balance sheet contribute to economic capital and surplus-at-risk. Computing such risk measures, or for that matter managing the market risk sensitivities at all, presents significant practical issues, stemming largely from the complexity of insurance products. One means to address these difficulties is to represent the insurance liability portfolios using standard financial instruments. Stéphane and Elena present a procedure to construct such replicating portfolios, and examine a number of practical issues with the procedure through two actual insurance liability portfolios.

JEL Classification: G10