, Volume 1, Issue 2 Supplement, pp 329-343
Date: 18 Jun 2011

Cash-flow based valuation of pension liabilities

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Abstract

This paper presents a computational framework for cash-flow based valuation of insurance liabilities in incomplete markets. It accounts for the risks associated with both insurance claims and investment returns until maturity in accordance with modern principles of asset-liability management. The valuation framework is market consistent in the sense that it takes into account the investment opportunities available to the insurer at the time of valuation. The framework is easily adapted to different lines of insurance and it can effectively employ advanced tools for strategic portfolio management. As an application, we value the insurance portfolio of the Finnish private sector occupational pension system where the liabilities extend over 82 years.