Summary |
In classical life insurance mathematics the obligations of the insurance company towards the policy holders were calculated on artificial conservative assumptions on mortality and interest rates. However, the classical approach is being superseded by developments in international accounting and solvency standards, coupled with theoretical advances in the understanding of the principles and methods for a more market-based valuation of risk, i.e., its price if traded in a free market.
The book describes these new approaches, and is the first to explain them in conjunction with more traditional methods. The exposition integrates methods and results from financial and insurance mathematics, and is based on the entries in a life insurance company’s market accounting scheme. With-profit insurance contracts are described in a classical actuarial model with a deterministic interest rate and no investment alternatives. The classical valuation based on conservative valuation assumption is explained and an alternative market valuation approach is introduced and generalized to stochastic interest rates and risky investment alternatives. The problem of incompleteness in insurance markets is addressed using a variety of methods, for example risk minimization, mean-variance hedging and utility optimization. The application of mathematical fiancé to unit-linked life insurance is unified with the theory of distribution of surplus in life and pension insurance. The final chapter gives an introduction to interest rate derivatives and their use in life insurance.
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