Protected Valuation Portfolio

  • Mario V. Wüthrich
  • Michael Merz
Part of the Springer Finance book series (FINANCE)

Abstract

The valuation portfolio constructed in the previous chapter covers expected insurance liabilities and leads to best-estimate reserves for insurance liabilities. However to price insurance liabilities it is not sufficient to consider expected insurance liabilities. In general, a (risk averse) risk bearer of the insurance liabilities asks for an additional margin for settling the (non-hedgeable) insurance technical risks and for covering possible shortfalls in their development. The sum of the best-estimate reserves and this margin for non-hedgeable insurance technical risks then constitutes the so-called risk-adjusted reserves. In this chapter we give a methodological approach for the construction of risk-adjusted reserves. For this purpose we construct the protected valuation portfolio, which is a valuation portfolio protected against insurance technical risks. We give explicit numerical examples in terms of life and non-life insurance portfolios which provide interesting deeper insights. The core concept here is to choose appropriate probability distortions.

Keywords

Cash Flow Spot Rate Insurance Liability Risk Aversion Parameter Conditional Tail Expectation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Mario V. Wüthrich
    • 1
  • Michael Merz
    • 2
  1. 1.RiskLab, Department of MathematicsETH ZurichZurichSwitzerland
  2. 2.Faculty for Economic and Social Studies, Department of Business AdministrationUniversity of HamburgHamburgGermany

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