European Actuarial Journal

, Volume 7, Issue 1, pp 1–28 | Cite as

Market inconsistencies of market-consistent European life insurance economic valuations: pitfalls and practical solutions

  • Julien Vedani
  • Nicole El Karoui
  • Stéphane Loisel
  • Jean-Luc Prigent
Original Research Paper


The Solvency II directive has introduced a specific so-called risk-neutral framework to valuate economic accounting quantities throughout European life insurance companies. The adaptation of this theoretical notion for regulatory purposes requires the addition of a specific criterion, namely market-consistency, in order to objectify the choice of the valuation probability measure. This paper points out and fixes some of the major risk sources embedded in the current regulatory life insurance valuation scheme. We compare actuarial and financial valuation schemes. We then first address operational issues and potential market manipulation sources in life insurance, induced by both theoretical and regulatory pitfalls. For example, we show that the economic own funds of a representative French life insurance company can vary by almost 140%, as already observed by market practitioners, when the interest rate model is calibrated in October or on the 31st of December. We then propose various modifications of the current implementation, including a first product-specific valuation scheme, to limit the impact of these market-inconsistencies.


Risk-neutral valuation Economic valuation Market-consistency European regulation Life insurance 



The authors acknowledge support from the ANR Project LoLitA (Dynamic Population Models for Human Longevity with Lifestyle Adjustments), the research chair Actuariat Durable sponsored by Milliman Paris, the research chair DAMI (Data Analytics and Models for Insurance) sponsored by BNP Paribas Cardif, and the research chair Risques Financiers sponsored by Société Générale.


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Copyright information

© EAJ Association 2017

Authors and Affiliations

  • Julien Vedani
    • 1
  • Nicole El Karoui
    • 2
  • Stéphane Loisel
    • 1
  • Jean-Luc Prigent
    • 3
  1. 1.Laboratoire de Science Actuarielle et Financière EA2429Univ Lyon, Université Claude Bernard Lyon 1LyonFrance
  2. 2.Laboratoire de Probabilité et Modèles Aléatoires, and Ecole Polytechnique, Centre de Mathématiques APpliquéesUniversité Pierre et Marie Curie - Paris 6ParisFrance
  3. 3.Laboratoire de Théorie Économique, Modélisation et Applications, LabeX MME-DIIUniversité de Cergy-PontoiseCergy-PontoiseFrance

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