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The value of a liability cash flow in discrete time subject to capital requirements

Author

Listed:
  • Hampus Engsner

    (Stockholm University)

  • Kristoffer Lindensjö

    (Stockholm University)

  • Filip Lindskog

    (Stockholm University)

Abstract

The aim of this paper is to define the market-consistent multi-period value of an insurance liability cash flow in discrete time subject to repeated capital requirements, and explore its properties. In line with current regulatory frameworks, the presented approach is based on a hypothetical transfer of the original liability and a replicating portfolio to an empty corporate entity, whose owner must comply with repeated one-period capital requirements but has the option to terminate the ownership at any time. The value of the liability is defined as the no-arbitrage price of the cash flow to the policyholders, optimally stopped from the owner’s perspective, taking capital requirements into account. The value is computed as the solution to a sequence of coupled optimal stopping problems or, equivalently, as the solution to a backward recursion.

Suggested Citation

  • Hampus Engsner & Kristoffer Lindensjö & Filip Lindskog, 2020. "The value of a liability cash flow in discrete time subject to capital requirements," Finance and Stochastics, Springer, vol. 24(1), pages 125-167, January.
    • Handle: RePEc:spr:finsto:v:24:y:2020:i:1:d:10.1007_s00780-019-00408-0
    DOI: 10.1007/s00780-019-00408-0
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Karim Barigou & Valeria Bignozzi & Andreas Tsanakas, 2021. "Insurance valuation: A two-step generalised regression approach," Post-Print hal-03043244, HAL.
    2. Engsner, Hampus & Lindskog, Filip & Thøgersen, Julie, 2023. "Multiple-prior valuation of cash flows subject to capital requirements," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 41-56.
    3. Hansjörg Albrecher & Karl‐Theodor Eisele & Mogens Steffensen & Mario V. Wüthrich, 2022. "On the cost‐of‐capital rate under incomplete market valuation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(4), pages 1139-1158, December.
    4. Christoph Moehr, 2023. "A framework for the valuation of insurance liabilities by production cost," Papers 2401.00263, arXiv.org.
    5. Hampus Engsner & Filip Lindskog & Julie Thoegersen, 2021. "Multiple-prior valuation of cash flows subject to capital requirements," Papers 2109.00306, arXiv.org.

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    More about this item

    Keywords

    Market-consistent valuation; Replicating portfolios; Capital requirements;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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