Utility-Consistent Valuation Schemes for the Own Risk and Solvency Assessment of Life Insurance Companies

In this paper, we construct new valuation schemes for the liabilities and economic capital of insurance companies. Specifically, we first build a valuation framework based on SAHARA utility functions, and second we construct a framework based on the cumulative prospect theory that incorporates the SAHARA utility function as a value function. The process used for assessing a life insurance company's own funds consists in replacing the market-consistent parametrization with a utility-consistent parametrization that accounts for the risk aversion of the market and the long-term duration of the company's commitments. Our illustrations show that this approach leads to a lower value of the own risk and solvency assessment, or ORSA, overall solvency needs and to a lower volatility of own funds. The SAHARA-CPT framework has the advantage over a pure SAHARA framework that it considers a precautionary overweighting of extreme events, as a tradeoff for additional model complexity