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Market inconsistencies of market-consistent European life insurance economic valuations: pitfalls and practical solutions. (English) Zbl 1394.91233

Summary: 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.

MSC:

91B30 Risk theory, insurance (MSC2010)
62P05 Applications of statistics to actuarial sciences and financial mathematics
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