Combining fair pricing and capital requirements for non-life insurance companies
The aim of this article is to identify fair equity-premium combinations for non-life insurers that satisfy solvency capital requirements imposed by regulatory authorities. In particular, we compare target capital derived using the value at risk concept as planned for Solvency II in the European Union with the tail value at risk concept as required by the Swiss Solvency Test. The model framework uses Merton's jump-diffusion process for the market value of liabilities and a geometric Brownian motion for the asset process; fair valuation is conducted using option pricing theory. We show that even if regulatory requirements are satisfied under different risk measures and parameterizations, the associated costs of insolvency - measured with the insurer's default put option value - can differ substantially.
Year of publication: |
2008
|
---|---|
Authors: | Gatzert, Nadine ; Schmeiser, Hato |
Published in: |
Journal of Banking & Finance. - Elsevier, ISSN 0378-4266. - Vol. 32.2008, 12, p. 2589-2596
|
Publisher: |
Elsevier |
Keywords: | Insurance regulation Fair valuation Solvency capital requirement Jump-diffusion process |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
The Impact of the Secondary Market on Life Insurers' Surrender Profits
Gatzert, Nadine, (2008)
-
The Swiss Solvency Test and its Market Implications
Eling, Martin, (2008)
-
The Effect of Capital and Risk Transfer Instruments in Financial Groups
Gatzert, Nadine, (2008)
- More ...