Utility-Consistent Valuation Schemes for the Own Risk and Solvency Assessment of Life Insurance Companies

Asia-Pacific Journal of Risk and Insurance

27 Pages Posted: 17 Oct 2017 Last revised: 4 Aug 2020

See all articles by Olivier Le Courtois

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Mohamed Majri

SMABTP

Li Shen

EMLYON Business School; EM Lyon (Ecole de Management de Lyon)

Date Written: October 16, 2017

Abstract

In this paper, we construct new valuation schemes for the liabilities and economic capital of insurance companies. Specifically, we first build a valuation framework based on SAHARA utility functions, and second we construct a framework based on the cumulative prospect theory that incorporates the SAHARA utility function as a value function. The process used for assessing a life insurance company's own funds consists in replacing the market-consistent parametrization with a utility-consistent parametrization that accounts for the risk aversion of the market and the long-term duration of the company's commitments. Our illustrations show that this approach leads to a lower value of the own risk and solvency assessment, or ORSA, overall solvency needs and to a lower volatility of own funds. The SAHARA-CPT framework has the advantage over a pure SAHARA framework that it considers a precautionary overweighting of extreme events, as a tradeoff for additional model complexity.

Keywords: Expected Utility Theory, Cumulative Prospect Theory, ORSA, Market-Consistent, Fair Value, Best Estimate of Liabilities, Overall Solvency Needs, Own Funds, SAHARA-CPT.

JEL Classification: G22, C14

Suggested Citation

Le Courtois, Olivier Arnaud and Majri, Mohamed and Shen, Li, Utility-Consistent Valuation Schemes for the Own Risk and Solvency Assessment of Life Insurance Companies (October 16, 2017). Asia-Pacific Journal of Risk and Insurance, Available at SSRN: https://ssrn.com/abstract=3054364 or http://dx.doi.org/10.2139/ssrn.3054364

Olivier Arnaud Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Mohamed Majri

SMABTP ( email )

114 avenue emile zola
paris, 75015
France

Li Shen (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

EM Lyon (Ecole de Management de Lyon) ( email )

23 Ave Guy de Collongue
Ecully, 69134
France

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