The cost of target capital in the valuation of life annuity business

Annamaria Olivieri~Ermanno Pitacco, Italie

The classical actuarial approach to the valuation of a life portfolio comes from the embedded value framework, under which the value of in-force business is given by the present value of future industrial profits net of the cost of capital, the amount of the latter being a function of the discount rate. In recent years, the adoption of market-consistent valuations of the insurance business has been advocated, mainly because of the lack of transparency of the classical model in setting the discount rate, joint to its inadequacy in reflecting properly the cost of the risks encumbering the portfolio. A market-consistent value usually acknowledges a reward for shareholders' capital as long as the market does, i.e. if the risk is systematic or undiversifiable. Aim of this paper (which actually represents a preliminary study) is to investigate how the cost of shareholders' capital can be assessed referring to a portfolio of immediate life annuities, and allowing in particular for uncertainty in future mortality trends, namely for longevity risk. To this purpose a link between traditional valuations and market-consistent valuations is proposed, whence a proper risk discount rate can be obtained
Date: 1 June - Time: 16:15 to 17:45 - Room: 343
Theme: 1.B. Solvency measurements and asset-liability management