Fair Dynamic Valuation of Insurance Liabilities: A Loss Averse Convex Hedging Approach

Scandinavian Actuarial Journal, https://doi.org/10.1080/03461238.2020.1750469

32 Pages Posted: 4 Feb 2020 Last revised: 15 May 2020

See all articles by Ze Chen

Ze Chen

Renmin University of China - School of Finance

Bingzheng Chen

Tsinghua University - School of Economics & Management

Jan Dhaene

Katholieke Universiteit Leuven

Date Written: January 11, 2020

Abstract

Hedging techniques have been widely adopted in market-consistent or fair valuation approach required by recent solvency regulations, to take into account the market prices of the hedgeable parts of insurance liabilities. In this study, we investigate the fair dynamic valuation of insurance liabilities, which are model-consistent (mark-to-model), market-consistent (mark-to-market), and time-consistent, as proposed by Barigou et al. (2019) in a multi-period setting. We introduce the loss averse convex hedging technique, which `punishes' loss outcomes more than gain outcomes. We prove that fair dynamic valuations are equivalent to the class of loss averse convex hedge-based valuation. Moreover, we propose and provide a complete characterization of loss averse mean-variance hedging and show how to implement loss averse mean-variance hedge-based dynamic valuations using numerical examples.

Keywords: Fair valuation, loss aversion, convex hedging, market-consistent valuation, safety margins

JEL Classification: G22

Suggested Citation

Chen, Ze and Chen, Bingzheng and Dhaene, Jan, Fair Dynamic Valuation of Insurance Liabilities: A Loss Averse Convex Hedging Approach (January 11, 2020). Scandinavian Actuarial Journal, https://doi.org/10.1080/03461238.2020.1750469. Available at SSRN: https://ssrn.com/abstract=3517693 or http://dx.doi.org/10.2139/ssrn.3517693

Ze Chen (Contact Author)

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

Bingzheng Chen

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Jan Dhaene

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

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